As
filed
with the Securities and Exchange Commission on March 29, 2006
Registration
No. 333-_________
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES
ACT OF 1933
ON
FORM
S-4
HLS
Systems International Ltd.
(Exact
name of registrant as specified in its charter)
|
British
Virgin Islands
|
6770
|
Not
Applicable
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
No.)
|
625
Broadway, Suite 1111
San
Diego, California 92101
(619)
795-4627
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Li
Zhang, Chief Executive Officer
625
Broadway, Suite 1111
San
Diego, California 92101
(619)
795-4627
(Name,
address, including zip code, and telephone number, including area code, of
agent
for service)
Copies
to:
|
Douglas
J. Rein
Amy
Hsiung
DLA
Piper Rudnick Gray Cary US LLP
4365
Executive Drive, Suite 1100
San
Diego, California 92121-2133
Telephone:
(858) 677-1400
Fax:
(858) 677-1401
|
Approximate
date of commencement of proposed sale to the public:
As
soon
as practicable after this registration statement becomes effective and all
other
conditions to the merger contemplated by the Agreement and Plan of Merger
described in the enclosed proxy statement/prospectus have been satisfied or
waived.
If
any of
the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box:
¨
If
this
form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act., check the following box and list the
Securities Act registration statement Number of the earlier effective
registration statement for the same offering.
¨
If
this
form is a post-effective amendment filed pursuant to Rule 462(b) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
¨
CALCULATION
OF REGISTRATION FEE
|
Title
of each Class of
Security
being registered
|
Amount
being Registered
|
Proposed
Maximum
Offering
Price Per
Security(l)
|
Proposed
Maximum
Aggregate
Offering
Price(l)
|
Amount
of
Registration
Fee
|
|
Units,
each consisting of one share
of
Common Stock, $.0001 par value,
and
two Warrants (2)
|
5,750,000
Units
|
$26.00
|
$149,500,000
|
$4,590
|
|
Shares
of Common Stock included as part of the Units
|
5,750,000
Shares
|
(2)
|
||
|
Warrants
included as part of the
Units
|
11,500,000
Warrants
|
(2)
|
||
|
Shares
of Common Stock underlying
the
Warrants included in the Units
(3)
|
11,500,000
Shares
|
$5.00
|
$57,500,000
|
$1,766
|
|
Shares
of Common Stock
|
1,250,000
Shares
|
$12.50
(4)
|
$15,625,000
|
$480
|
|
Representative's
Unit Purchase
Option
|
1
|
$100
|
$100.00
|
(2)
|
|
Units
underlying the
Representative's
Unit Purchase
Option
("Underwriter's Units")(3)
|
250,000
Units
|
$7.50
|
$1,875,000
|
$58
|
|
Shares
of Common Stock included
as
part of the Underwriter's Units(3)
|
250,000
Shares
|
(2)
|
||
|
Warrants
included as part of the
Underwriter's
Units(3)
|
500,000
Warrants
|
(2)
|
||
|
Shares
of Common Stock underlying
the
Warrants included in the
Underwriter's
Units(3)
|
500,000
Shares
|
$6.65
|
$3,325,000
|
$103
|
|
Total
Fee Due
|
$6,997
|
|||
|
(1)
|
Based
on the market price of the Units or exercise price for the purpose
of
calculating the registration fee pursuant to
|
|
|
Rule
457(f)(l) and Rule 457(g)(l).
|
|
(2)
|
No
fee pursuant to Rule 457(g).
|
|
(3)
|
Pursuant
to Rule 416, there are also being registered such indeterminable
additional securities as may be issued as a result of the anti-dilution
provisions contained in the Warrants.
|
|
(4)
|
Based
on the market price of a share of common stock on March 24,
2006.
|
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its
effective
date until the registrant shall file a further amendment which specifically
states that this registration statement shall
thereafter
become effective in accordance with Section 8(a) of the Securities Act of 1933,
as amended, or until the
registration
statement shall become effective on such date as the Securities and Exchange
Commission, acting pursuant to
said
Section 8(a), may determine.
Chardan
North China
Acquisition
Corporation
625
Broadway, Suite 1111
San
Diego, CA 92101
To
the
Stockholders of Chardan North China Acquisition Corporation:
You
are
cordially invited to attend a special meeting of the stockholders of Chardan
North China Acquisition Corporation (“Chardan”), relating to its proposed
purchase of the stock of Gifted Time Holdings, Ltd. (“HollySys Holdings”), a
British Virgin Islands company, and related matters. The meeting will be held
at
_____ a.m., Pacific Time, on ____________, 2006, at Chardan’s offices at 625
Broadway, Suite 1111, San Diego, California, 92101.
At
this
meeting, you will be asked to consider and vote upon the following
proposals:
1.
to
approve a Stock Purchase Agreement, dated as of February 2, 2006 (“Purchase
Agreement”) among Chardan and the stockholders of Gifted Time Holdings, Ltd., a
holding company that owns or controls operating companies in the People’s
Republic of China, known collectively as HollySys (the “HollySys Stockholders”)
and the transactions contemplated thereby. The HollySys Stockholders have
already approved the Purchase Agreement;
2.
to
approve the merger of Chardan with and into a wholly owned subsidiary formed
under the laws of the British Virgin Islands, with the name HLS Systems
International Ltd. (“HLS”) for the purposes of redomestication of our company to
the British Virgin Islands (the “Redomestication Merger”) as part of the
acquisition of HollySys; and
3.
to
approve the Chardan 2006 Equity Plan (“Stock Option Plan”);
If
these
proposals are approved:
|
·
|
we
will acquire an operating business in
China;
|
|
·
|
we
will change our corporate domicile from the State of Delaware to
the
British Virgin Islands, which means we will be governed by the laws
of the
British Virgin Islands;
|
|
·
|
we
will change our corporate name to “HLS Systems International Ltd.” as a
result of the Redomestication
Merger;
|
|
·
|
the
majority of our board of directors and officers will be the designee
of
the HollySys Stockholders;
|
|
·
|
the
HLS Memorandum of Association and the Articles of Association will
become
the equivalent of our certificate of incorporation and by-laws,
respectively;
|
|
·
|
each
share of common stock of Chardan will automatically convert into
one share
of common stock of HLS; and
|
|
·
|
each
outstanding warrant of Chardan will be assumed by HLS with the same
terms,
but exercisable for common stock of
HLS.
|
HLS
will
continue as a reporting company under the Securities Exchange Act of 1934,
as
amended, and intends to apply to have its units, common stock and warrants
traded on the Nasdaq National Market concurrent with the consummation of the
Redomestication Merger. HLS will be a foreign private issuer after the
Redomestication Merger.
We
will
not consummate the transactions described under proposal 1 unless the
Redomestication Merger in proposal 2 is also approved. Similarly, the
Redomestication Merger will not take place if the Purchase Agreement is not
approved. The approval of the Stock Option Plan in proposal 3 is not a condition
to consummation for the Purchase Agreement and the Redomestication
Merger.
Pursuant
to the Purchase Agreement, the HollySys Stockholders and their designees will
be
paid an aggregate of $30,000,000 in cash and will receive an aggregate of
23,500,000 shares of HLS common stock as payment for all the outstanding common
stock of HollySys. A variable portion of the cash payment (ranging from
$3,000,000 up to $7,000,000), will be deferred until HollySys generates
sufficient operating cash flow or HLS receives additional financing. The amount
of the cash consideration that is deferred will depend on the number of shares
that are redeemed by shareholders who vote against approval of the Purchase
Agreement.
The
initial cash payment will be made with the funds from the trust account with
the
balance of the trust account to be used by HLS for operating
capital.
As
additional consideration, the HollySys Stockholders and their designees will
be
issued up to an aggregate of 8,000,000 shares of common stock of HLS (2,000,000
per year on an all-or-one basis) for each of the four fiscal years beginning
with fiscal 2007 if, on a consolidated basis, HLS generates after-tax profits
(excluding after-tax operating profits from any subsequent acquisitions of
securities that have a dilutive effect) of at least the following
amounts:
|
Year
ending June 30,
|
After-Tax
Profit
|
||
|
2007
|
$23,000,000
|
||
|
2008
|
$32,000,000
|
||
|
2009
|
$43,000,000
|
||
|
2010
|
$61,000,000
|
The
affirmative vote of the holders of a majority of the outstanding shares of
Chardan common stock is required to approve each of the Purchase Agreement
and
the Redomestication Merger. The approval of the Purchase Agreement is subject
to
an additional condition, that no more than 20% of the shares issued in Chardan’s
initial public offering (the “Public Shares”) both vote against the approval of
the Purchase Agreement and are redeemed for their pro rata share of the trust
fund, as described in the next paragraph. The affirmative vote of holders of
a
majority of the shares represented and entitled to vote at the meeting is
required for approval of the Stock Option Plan.
Each
Chardan stockholder who holds shares of common stock issued in Chardan’s initial
public offering has the right to vote against the stock purchase proposal,
and
any who vote against it may also demand that Chardan redeem such stockholder’s
shares for cash equal to a pro rata portion of the funds held in the trust
account into which a substantial portion of the net proceeds of Chardan’s
initial public offering was deposited. These shares will be redeemed only if
the
Purchase Agreement is consummated. However, if the holders of 1,150,000 or
more
shares of common stock issued in Chardan’s initial public offering both vote
against the stock purchase proposal and demand conversion of their shares,
then
Chardan will not consummate the Purchase Agreement. Chardan’s initial
stockholders who purchased their shares of common stock prior to its initial
public offering and presently own an aggregate of approximately 17.8% of the
outstanding shares of Chardan common stock, have agreed to vote all of their
shares on the Purchase Agreement and Redomestication Merger proposals as the
majority of the Public Shares are voted. Chardan’s initial stockholders do not
have the right to redeem their stock.
Immediately
after consummation of the Purchase Agreement, if no holder of Public Shares
demands that Chardan convert these shares into a pro rata portion of the trust
account, Chardan stockholders will own approximately 23% of HLS’s issued and
outstanding shares of common stock. If one or more holders of the Public Shares
vote against the stock purchase proposal and demand that Chardan convert their
shares into a pro rata portion of the trust account, then Chardan’s stockholders
will own less than approximately 23% of HLS’s issued and outstanding shares of
common stock.
Chardan’s
shares of common stock, warrants and units currently are listed on the
Over-the-Counter Bulletin Board under the symbols CNCA, CNCAW and CNCAU,
respectively. Chardan intends to apply for listing on the Nasdaq National Market
effective on the consummation of the Redomestication Merger under the proposed
symbols HLSS, HLSSW and HLSSU. If the securities are not listed on Nasdaq,
they
will continue to trade on the OTCBB.
After
careful consideration of the terms and conditions of the proposed Purchase
Agreement, the Redomestication Merger and the Stock Option Plan, the board
of
directors of Chardan has determined that the Purchase Agreement and the
transactions contemplated thereby, the Redomestication Merger and the Stock
Option Plan are fair to and in the best interests of Chardan and its
stockholders. The board of directors of Chardan did not obtain a fairness
opinion on which to base this assessment. The board of directors of Chardan
unanimously recommends that you vote or give instruction to vote “FOR” the
approval of the Purchase Agreement, the Redomestication Merger and the Stock
Option Plan.
Enclosed
is a notice of special meeting and proxy statement containing detailed
information concerning the Purchase Agreement and the transactions contemplated
thereby, the Redomestication Merger and the Stock Option Plan. Whether or not
you plan to attend the special meeting, we urge you to read this material
carefully.
Your
vote is important. Whether you plan to attend the special meeting or not, please
indicate your votes, sign, date and return the enclosed proxy card as soon
as
possible in the envelope provided.
I
look
forward to seeing you at the meeting.
Sincerely,
Richard
D. Propper, MD
Chairman
of the Board
Chardan
North China
Acquisition
Corporation
625
Broadway, Suite 1111
San
Diego, CA 92101
NOTICE
OF SPECIAL MEETING OF STOCKHOLDERS
TO
BE HELD ON ____________, 2006
TO
ALL
THE STOCKHOLDERS OF CHARDAN NORTH CHINA ACQUISITION CORPORATION
NOTICE
IS
HEREBY GIVEN that a special meeting of stockholders, including any adjournments
or postponements thereof, of Chardan North China Acquisition Corporation
(“Chardan”), a Delaware corporation, will be held _____ a.m. Pacific time, on
____________, 2006, at Chardan’s offices at 625 Broadway, Suite 1111, San Diego,
California, 92101 for the following purposes:
|
·
|
To
consider and vote upon a proposal to adopt the Stock Purchase Agreement,
dated as of February 2, 2006, among Chardan, and the stockholders
of a
holding company known as Gifted Times Holding Limited (“HollySys
Holdings”), a British Virgin Islands company that owns or controls
operating companies (known as “HollySys”) in the People’s Republic of
China, and the transactions contemplated
thereby;
|
|
·
|
To
consider and vote upon the merger of Chardan into its wholly owned
subsidiary HLS Systems International Ltd. (“HLS”), formed under the laws
of the British Virgin Islands, for the purposes of reincorporation
and
redomestication of Chardan to the British Virgin Islands (the
“Redomestication Merger”); and
|
|
·
|
To
consider and vote upon a proposal to adopt the Chardan 2006 Equity
Plan.
|
The
board
of directors has fixed the close of business on ______________, 2006 as the
record date for which Chardan stockholders are entitled to receive notice of,
and to vote at, the Chardan special meeting and any adjournments thereof. Only
the holders of record of Chardan common stock on that date are entitled to
have
their votes counted at the Chardan special meeting and any adjournments or
postponements of that meeting.
Chardan
will not transact any other business at the special meeting, except for business
properly brought before the special meeting (or any adjournment or postponement
of the meeting) by Chardan’s board of directors.
Your
vote
is important. Please indicate your votes on, sign, date and return your proxy
card as soon as possible to make sure that your shares are represented at the
special meeting. If you are a stockholder of record of Chardan common stock,
you
may also cast your vote in person at the special meeting. If your shares are
held in an account at a brokerage firm or bank, you must instruct your broker
or
bank on how to vote your shares. If you do not vote or do not instruct your
broker or bank how to vote, it will have the same effect as voting against
the
stock purchase agreement and the Redomestication Merger.
The
board of directors of Chardan unanimously recommends that you vote “FOR” the
approval of the stock purchase agreement, the Redomestication Merger and the
stock option plan.
By
Order
of the Board of Directors,
Richard
D. Propper, MD
Chairman
of the Board
_____________,
2006
PROXY
STATEMENT FOR SPECIAL MEETING OF STOCKHOLDERS OF
CHARDAN
NORTH CHINA ACQUISITION CORPORATION
PROSPECTUS
FOR UP TO 6,000,000 UNITS, 19,250,000 SHARES OF COMMON STOCK, AND
12,000,000
WARRANTS OF HLS AND ONE REPRESENTATIVE UNIT PURCHASE OPTION
________________________________________
The
board
of directors of Chardan North China Acquisition Corporation (“Chardan”) and its
wholly-owned subsidiary, HLS Systems International Ltd. (“HLS”) have unanimously
approved the acquisition of the shares of Gifted Time Holdings, Ltd., a holding
company (“HollySys Holdings”) that owns or controls operating companies (known
as “HollySys”) in the People’s Republic of China, pursuant to a stock purchase
agreement whereby Chardan will purchase all of the outstanding securities of
HollySys Holdings held by the stockholders (the “HollySys Stockholders”). The
board of directors of Chardan also has unanimously approved the simultaneous
reincorporation of Chardan from the State of Delaware to the British Virgin
Islands, through a Redomestication Merger with HLS.
In
the
Redomestication Merger, HLS will issue its securities in exchange for the
outstanding securities of Chardan. This prospectus covers an aggregate of
6,000,000 units, 19,250,000 shares of common stock, 12,000,000 warrants and
one
representative unit purchase option. The common stock and warrants issuable
upon
exercise of the aforementioned securities are included in the aggregate amounts
stated above. HLS will issue its securities on the same terms as the equivalent
securities had been issued by Chardan.
Chardan
was organized to serve as a vehicle for the acquisition of an operating business
that has its primary operating facilities based in the Peoples Republic of
China
in any city or province north of the Yangtze River. HollySys Holdings, through
its Chinese operating companies, is a leader in the automation and controls
industry in China.
Chardan’s
common stock, warrants and units are currently listed on the Over-the-Counter
Bulletin Board under the symbols CNCA, CNCAW and CNCAU, respectively. HLS
intends to apply to have its securities listed on the Nasdaq National Market
effective at the time of the Redomestication Merger. The proposed symbols are
HLSS, HLSSW and HLSSU.
This
proxy statement/prospectus provides you with detailed information about the
acquisition of HollySys and Redomestication Merger and the special meeting
of
stockholders. We encourage you to read this entire document and the documents
incorporated by reference carefully. YOU SHOULD ALSO CAREFULLY CONSIDER THE
RISK
FACTORS BEGINNING ON PAGE 30.
The
acquisition of HollySys and Redomestication Merger will be completed upon
approval of at least a majority of the shares of common stock outstanding
present in person or by proxy and entitled to vote at the special meeting on
____________, 2006.
THESE
SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THIS
PROXY STATEMENT/PROSPECTUS IS DATED ____________, 2006, AND IS FIRST BEING
MAILED TO CHARDAN STOCKHOLDERS ON OR ABOUT ____________, 2006.
8
TABLE
OF CONTENTS
ANNEXES
A—Stock
Purchase Agreement
B—Form
of
HLS Memorandum of Association, including all amendments
C—Form
of
HLS Articles of Association
D—The
Chardan 2006 Equity Plan
E—HLS
Audit Committee Charter
F—HLS
Nominating Committee Charter
G—HLS
Code of Ethics
H—Section
262 of the Delaware General Business Law
This
proxy statement/prospectus incorporates important business and financial
information about Chardan, HollySys and the HollySys Operating Companies that
is
not included in or delivered with the document. This information is available
without charge to security holders upon written or oral request. The request
should be sent to:
Dr.
Richard Propper
c/o
Chardan North China Acquisition Corporation
625
Broadway, Suite 1111
San
Diego, California 92101
(619)
795-4627
To
obtain
timely delivery of requested materials, security holders must request the
information no later than five business days before the date they submit their
proxies or attend the special meeting. The latest date to request the
information to be received timely is ____________, 2006.
The
financial statements of HollySys are prepared using Renminbi, the currency
of
the Peoples Republic of China (“PRC”). For convenience, the Renminbi amounts
have been converted throughout the text of the proxy statement/prospectus into
United States dollars. Until recently, the Renminbi was a controlled currency,
and the exchange rate maintained by the PRC was approximately 8.11 Renminbi
to
one United States dollar. The Chinese government has recently altered its policy
toward the rate of exchange of the Renminbi versus the US dollar. Changing
from
a previously fixed rate policy regarding the dollar, the Renminbi has recently
been permitted to float within a fixed range against a basket of currencies,
including the US dollar, Japanese Yen and European Euro, which has resulted
in
the Renminbi being allowed to appreciate 2% +/- 0.3% vs. the dollar. Since
the
company’s business is presently 100 percent domestic within PRC, this change
will have no effect on the company’s business, but may result in a concomitant
increase in its after-tax earnings when stated in dollar terms. In the future,
the company’s earnings stated in US dollars will fluctuate in accordance with
the change in exchange rate.
Under
the law of the British Virgin Islands, HLS is authorized to issue “ordinary
shares” and holders of ordinary shares are “members.” References to ordinary
shares and members have been translated to common stock and stockholders, which
are terms more familiar to United States persons, whom Chardan believes are
the
majority of its stockholders.
QUESTIONS
AND ANSWERS ABOUT THE MEETING
|
Q.
|
Why
is Chardan proposing the stock purchase?
|
A.
|
Chardan
was organized to effect a business combination with an operating
business
that has its primary operating facilities located in the People’s Republic
of China in any city or province north of the Yangtze River. The
operating
companies of HollySys, after the consummation of the stock purchase
will
be Beijing HollySys Co., Ltd., Hangzhou HollySys Automation Co.,
Ltd., and
Beijing HollySys Haotong Science & Technology Development Co.,
Ltd. (these three companies are referred to as the “HollySys Operating
Companies”). Together they are one of the leading automation and control
systems companies in China The HollySys Operating Companies have,
collectively, demonstrated significant growth since commencing operations
in 1993. Chardan believes that the HollySys Operating Companies are
in a
position to expand their business through the development of additional
products and the expansion of their customer base, including entry
into
the international market. As a result, Chardan believes that a business
combination with HollySys will provide Chardan stockholders with
an
opportunity to participate in a combined company with significant
growth
potential.
|
|
|
Q.
|
Why
is Chardan proposing the Redomestication Merger?
|
A.
|
Chardan
is proposing the reincorporation of itself into a company formed
under the
laws of the British Virgin Islands to align its income tax liabilities
with the location of its activities to reduce the overall impact
of
corporate income tax on the surviving company and its stockholders.
Because the future operations will be almost exclusively outside
the
United States, the Redomestication Merger is intended to reduce or
entirely eliminate the income tax liability of the company in the
United
States and permit greater flexibility in structuring acquisitions
or
creating subsidiaries in China and other countries as the business
of
HollySys expands as well as with regard to declaring dividends, should
the
company wish to do so in the future. By becoming a non-United States
company, Chardan believes that the successor company will only be
taxed on
its operations by the jurisdiction in which they are located and
undertaken, and will not be subject to additional income taxes merely
by
virtue of the location of its place of incorporation.
|
|
|
Q.
|
Why
is Chardan proposing the stock option plan?
|
A.
|
Chardan
is proposing the stock option plan to enable the company to attract,
retain and reward its directors, officers, employees and consultants
using
equity-based incentives.
|
|
|
Q.
|
What
is being voted on?
|
A.
|
There
are three proposals that you are being asked to vote on. The first
proposal is to adopt the stock purchase agreement, dated February
2, 2006
and the transactions contemplated thereby. We refer to this proposal
as
the stock purchase proposal.
The
second proposal is to approve the merger of Chardan with and into
HLS for
purposes of redomestication to the British Virgin Islands. We refer
to
this proposal as the Redomestication Merger proposal.
The
third proposal is to adopt Chardan’s 2006 Equity Plan. We refer to this
proposal as the stock option plan proposal.
|
|
Q.
|
What
vote is required in order to adopt the stock purchase
proposal?
|
A.
|
The
approval of the stock purchase will require the affirmative vote
of a
majority of the outstanding shares of Chardan’s common stock. If the
holders of 1,150,000 or more shares of common stock issued in Chardan’s
initial public offering vote against the stock purchase and demand
that
Chardan convert their shares into a pro rata portion of the trust
account
as of the record date, then the stock purchase will not be consummated.
No
vote of the holders of Chardan’s warrants is necessary to adopt the stock
purchase proposal or other proposals, and Chardan is not asking the
warrant holders to vote on the stock purchase proposal or the other
proposals. Chardan will not consummate the transaction described
in the
stock purchase proposal unless the Redomestication Merger is also
approved. Similarly, the Redomestication Merger will not be consummated
if
the stock purchase proposal is not approved. The approval of the
stock
option plan proposal is not a condition to the consummation of the
stock
purchase or Redomestication Merger proposals.
|
|
|
Q.
|
What
vote is required in order to adopt the Redomestication
Merger?
|
The
affirmative vote of the holders of a majority of the outstanding
shares of
Chardan common stock is required to approve the Redomestication Merger
proposal.
|
||
|
Q.
|
What
vote is required in order to adopt the stock option plan?
|
A.
|
The
approval of the stock option plan will require the affirmative vote
of a
majority of the shares represented and entitled to vote at the meeting.
The approval of the stock option plan is not a condition to the approval
of the stock purchase or the Redomestication Merger
proposals.
|
|
|
Q.
|
How
do the Chardan insiders intend to vote their shares?
|
A.
|
All
of the insiders who purchased their shares prior to the initial public
offering (including the officers and directors of Chardan) have agreed
to
vote the shares held by them on the stock purchase and Redomestication
Merger proposals in accordance with the vote of the majority of the
shares
of common stock issued in Chardan’s initial public offering. They have
indicated that they also will vote in favor of the stock option plan
proposal.
|
|
|
Q.
|
What
will I receive in the Redomestication Merger?
|
A.
|
Chardan
security holders will receive an equal number of shares of common
stock of
HLS in exchange for their Chardan common stock, and HLS will assume
the
outstanding Chardan warrants, the terms and conditions of which will
not
change, except that on exercise, they will receive HLS common
stock.
|
|
|
Q.
|
How
will the Redomestication Merger be accomplished?
|
A.
|
Chardan
will merge into HLS, Chardan’s wholly owned subsidiary that is
incorporated as a British Virgin Islands company. As a result of
the
Redomestication Merger, each currently issued outstanding share of
common
stock of Chardan will automatically convert into a share of common
stock
of HLS. This procedure will result in your becoming a stockholder
in HLS
instead of Chardan.
|
|
|
Q.
|
Will
the Chardan stockholders be taxed as a result of the Redomestication
Merger?
|
A.
|
Generally
for United States federal income tax purposes, stockholders who are
United
States holders should not recognize any gain or loss as a result
of the
Redomestication Merger. We urge you to consult your own tax advisors
with
regard to your particular tax consequences of the Redomestication
Merger.
|
|
|
Q.
|
Will
Chardan be taxed on the Redomestication Merger?
|
A.
|
Chardan
will recognize gain, but not loss, as a result of the Redomestication
Merger equal to the difference, if any, between the adjusted tax
basis of
any Chardan asset and such asset’s fair market value at the effective time
of the Redomestication Merger.
|
|
Q.
|
How
much of the surviving company will existing Chardan stockholders
own?
|
A.
|
The
HollySys Stockholders and their designees initially will receive
23,500,000 shares of common stock of HLS, representing 77% of the
issued
and outstanding shares immediately after the acquisition. After the
stock
purchase, if no Chardan stockholders demand that Chardan convert
their
shares into a pro rata portion of the trust account and no Chardan
stockholder exercises its appraisal rights, then Chardan’s stockholders
who own shares immediately prior to the stock purchase will own
approximately 23% of the outstanding common stock of HLS. Existing
Chardan
stockholders could own less than approximately 23% if one or more
Chardan
stockholders vote against the stock purchase proposal and demand
conversion of their shares into a pro rata portion of the trust account
or
if they exercise appraisal rights. Similarly, existing Chardan
stockholders will own less than 23% of HLS, if HLS issues (as additional
consideration) the additional shares to the HollySys Stockholders
or their
designees by reason of the HLS achieving the after-tax profit targets
specified in the stock purchase agreement for one or more of the
four
fiscal years beginning with fiscal 2007.
|
|
Q.
|
How
much dilution will I experience?
|
A.
|
Currently
there are 7,000,000 shares of common stock of Chardan outstanding.
At
least 23,500,000 additional shares will be issued for acquisition
of
HollySys. Therefore, current shareholders will own approximately
23% of
the company, which is a dilution of absolute ownership of 77%. To
the
extent shares representing additional consideration are issued to
the
HollySys Stockholders upon achieving one or more of the after-tax
profit
targets and outstanding warrants are exercised, the current stockholders
will experience further dilution of their ownership interest in the
company.
|
|
Q.
|
What
will the name of the surviving company be after the stock
purchase?
|
A.
|
The
name of the surviving company following completion of the stock purchase
and Redomestication Merger will be “HLS Systems International
Ltd.”
|
|
Q.
|
Do
I have conversion rights?
|
A.
|
If
you hold shares of common stock issued in Chardan’s initial public
offering, then you have the right to vote against the stock purchase
proposal and demand that Chardan convert these shares into a pro
rata
portion of the trust account in which a substantial portion of the
net
proceeds of Chardan’s initial public offering are held. We sometimes refer
to these rights to vote against the stock purchase and demand conversion
of the shares into a pro rata portion of the trust account as conversion
rights.
|
|
Q.
|
If
I have conversion rights, how do I exercise them?
|
A.
|
If
you wish to exercise your conversion rights, you must vote against
the
stock purchase proposal and at the same time demand that Chardan
convert
your shares into cash. If, notwithstanding your vote, the stock purchase
is completed, then you will be entitled to receive a pro rata portion
of
the trust account, including any interest earned thereon through
the
record date. You will be entitled to convert each share of common
stock
that you hold into approximately $[__________]. If you exercise your
conversion rights, then you will be exchanging your shares of Chardan
common stock for cash and will no longer own these shares. You will
be
entitled to receive cash for these shares only if you continue to
hold
these shares through the closing of the stock purchase and then tender
your stock certificate. If the stock purchase is not completed, then
your
shares cannot be converted to cash until either you vote against
a
subsequently proposed combination and exercise your conversion rights
or
unless Chardan fails to achieve a business combination in a timely
manner,
at which time your shares will be automatically converted to
cash.
|
|
Q.
|
What
happens to the funds deposited in the trust account after consummation
of
the stock purchase?
|
A.
|
Upon
consummation of the stock purchase:
the
stockholders electing to exercise their conversion rights will receive
their pro rata portion of the funds in the trust account;·up to
$27,000,000 of the funds in the trust account will be paid to the
HollySys
Stockholders as part of the stock purchase consideration; and any
balance
of the funds in the trust account will be retained by HLS for operating
capital subsequent to the closing of the business combination and
for
potential use to pay the deferred purchase price.
|
|
Q.
|
Who
will manage the combined company?
|
A.
|
The
combined company will be managed by the current management of HollySys.
Dr. Wang Changli, who is currently the chief executive officer of
HollySys, will become the chief executive officer and a director
of HLS.
Madame Qiao Li, who is currently the Chairman of HollySys, will be
a
director and chairman of the HLS board of directors. Kerry S. Propper,
who
is currently the chief financial officer, secretary, and a director
of
Chardan, and Mr. Sun Dongying will also become directors of HLS.
There
will be five additional directors.
|
|
Q.
|
Do
I have dissenter or appraisal rights?
|
A.
|
In
connection with the Redomestication Merger, the Chardan stockholders
have
appraisal rights under Delaware corporate law.
|
|
Q.
|
What
happens if the stock purchase is not consummated?
|
A.
|
If
the stock purchase is not consummated, Chardan will continue to search
for
an operating company to acquire. However, Chardan will be liquidated
if it
does not consummate a business combination by February 10, 2007,
unless a letter of intent, agreement in principle or definitive agreement
has been executed by February 10, 2007, in which case, Chardan will
be liquidated if it does not consummate such business combination
by
August 10, 2007. In any liquidation, the funds held in the trust
account, plus any interest earned thereon, together with any remaining
net
assets outside of the trust, will be distributed pro rata to Chardan’s
common stockholders, excluding the Chardan initial stockholders,
each of
whom has waived any right to any liquidation
distribution.
|
|
Q.
|
When
do you expect the stock purchase to be completed?
|
A.
|
Pending
receipt of the required stockholder approvals, it is currently anticipated
that the stock purchase will be completed promptly following the
Chardan
special meeting on ____________, 2006.
|
|
Q.
|
If
I am not going to attend the Chardan special meeting in person, should
I
return my proxy card instead?
|
A.
|
Yes.
After carefully reading and considering the information contained
in this
proxy statement/prospectus, please fill out and sign your proxy card.
Then
return the enclosed proxy card in the return envelope as soon as
possible,
so that your shares may be represented at the Chardan special
meeting.
|
|
Q.
|
What
will happen if I abstain from voting or fail to vote?
|
A.
|
An
abstention or failure to vote will have the same effect as a vote
against
the stock purchase proposal, but will not have the effect of converting
your shares into a pro rata portion of the trust account. An abstention
or
failure to vote will also have the effect of voting against the
Redomestication Merger, but will have no effect on the approval of
the
stock option plan.
|
|
Q.
|
What
do I do if I want to change my vote?
|
A.
|
Send
a later-dated, signed proxy card to Chardan’s secretary prior to the date
of the special meeting or attend the special meeting in person and
vote.
You also may revoke your proxy by sending a notice of revocation
to
Chardan’s secretary at the address of Chardan’s corporate
headquarters.
|
|
Q.
|
If
my shares are held in “street name” by my broker, will my broker vote my
shares for me?
|
A.
|
No.
Your broker can vote your shares only if you provide instructions
on how
to vote. You should instruct your broker to vote your shares, following
the directions provided by your
broker.
|
|
Q.
|
Do
I need to turn in my old certificates?
|
A.
|
No.
If you hold your securities in Chardan in certificate form, as opposed
to
holding them through your broker, you do not need to exchange them
for
certificates issued by HLS. Your current certificates will represent
your
rights in HLS. You may exchange them by contacting the transfer agent,
Continental Stock Transfer & Trust Company, Reorganization Department,
and following their requirements for reissuance. If you elect conversion
or appraisal, you will need to deliver your old certificate to
Chardan.
|
|
Q.
|
Who
can help answer my questions?
|
A.
|
If
you have questions about the stock purchase, you may write or call
Chardan
North China Acquisition Corporation, 625 Broadway, Suite 1111, San
Diego,
CA 92101. The phone number is (619)
795-4627.
|
Enforceability
of Civil Liabilities Against Foreign Persons
HollySys
Holdings is incorporated under the laws of the British Virgin Islands, and
its
operating companies are incorporated under the laws of the PRC and operate
only
in the PRC. Substantially all of the assets of HollySys and its Chinese
operating companies will be located in the PRC, and the majority of its officers
and directors and the experts named in this joint proxy/prospectus are outside
the United States. Although China and the United States are signatories to
the
1965 Hague Convention on the Service Abroad of Judicial and Extra Judicial
Documents in Civil and Commercial Matters, service under this treaty is
cumbersome and time consuming and may not result in adequate notice, such that
any judgment based on service thereunder may be reopened, relitigated and
overturned. Therefore, an investor should understand it is not likely that
service of process upon the company or its subsidiaries, its officers and
directors, its assets and experts will be obtainable within the United States
or
for actions originating in the United States.
It
will
be difficult for investors to enforce outside the United States a judgment
against HLS or its Chinese operating companies or its assets obtained in the
United States in any actions, including actions predicated upon the civil
liability provisions of the federal securities laws of the United States or
of
the securities laws of any State of the United States. In addition, the
directors and executive officers and certain of the experts named in this joint
proxy/prospectus are resident outside the United States, and all or a
substantial portion of the assets of these persons are or may be located outside
the United States. Therefore, it may not be possible for investors to effect
service of process within the United States upon them, or to enforce against
them any judgments obtained in United States courts, including judgments
predicated upon the civil liability provisions of the federal securities laws
of
the United States or of the securities laws of any state of the United
States.
The
difficulty of enforcing a judgment of a United States court in the PRC where
most of the assets of the company are located and which is the residence of
most
of the directors and officers of the company, stems from the lack of any
official arrangement providing for judicial assistance to the enforcement of
judgments of courts of the United States in the PRC. The PRC does not have
treaties providing for the reciprocal recognition and enforcement of judgments
of courts within the United States. In the absence of such a treaty, judgments
of United States courts will not be enforced in the PRC without review of the
merits of the claims and the claims brought in the original action in the United
States court will have to be re-litigated on their merits.
Likewise,
administrative actions brought by regulatory authorities, such as the SEC,
and
other actions that result in foreign court judgments, could (assuming such
actions are not required by PRC law to be arbitrated) only be enforced in the
PRC if such judgments or rulings do not violate the basic principles of the
law
of the PRC or the sovereignty, security and public interest of the society
of
China, as determined by a People’s Court of China that has jurisdiction for
recognition and enforcement of judgments.
We
have
been advised that there is doubt as to the enforceability in the PRC of any
actions to enforce judgments of United States or British Virgin Islands courts
arising out of or based on the ownership of the securities of HLS, including
judgments arising out of or based on the civil liability provisions of United
States federal or state securities laws, and as to whether PRC courts would
enforce, in original actions, judgments against HLS, its directors and officers
and assets in the PRC predicated solely upon the federal securities laws of
the
United States. An original action may be brought in the PRC against HLS or
its
subsidiaries or its directors and officers and experts named in this
prospectus/proxy statement only if the actions are not required to be arbitrated
by PRC law and only if the facts alleged in the complaint give rise to a cause
of action under PRC law. In connection with such an original action, a PRC
court
may award civil liability, including monetary damages.
SUMMARY
Summary
This
section summarizes material items related to the proposals to be voted on.
These
items are described in greater detail elsewhere in this proxy
statement/prospectus. You should carefully read this proxy statement/prospectus
and the other documents to which this proxy statement/prospectus refers you.
See
“Where You Can Find More Information.”
The
Companies
Chardan
Chardan
is a blank check company organized as a corporation under the laws of the State
of Delaware on March 10, 2005. Chardan was formed to effect a business
combination with an unidentified operating business that has its primary
operating facilities located in the People’s Republic of China in any city or
province north of Yangtze River. In August 2005, Chardan successfully
consummated an initial public offering of its equity securities from which
it
derived net proceeds of approximately $30.9 million. The prices of Chardan’s
common stock, warrants to purchase common stock and units (each unit consisting
of one share of common stock and two warrants to purchase common stock) are
quoted on the Over-the-Counter Bulletin Board under the symbols CNCA for the
common stock, CNCAW for the warrants and CNCAU for the units. Approximately
$29.8 million of the net proceeds of the initial public offering was placed
in a
trust account and will be released to Chardan upon consummation of the stock
purchase, subject to the exercise of conversion rights by holders of less than
20% of the Chardan stock issued in the initial public offering. The balance
of
the net proceeds from the initial public offering of approximately $1.1 million
has been used by, or is available to, Chardan to pay the expenses incurred
in
its pursuit of a business combination. Through September 30, 2005, Chardan
had
incurred a total of approximately $146,000 in expenses. The most significant
expenses incurred to date include approximately $67,000 for consultants to
Chardan who have assisted with due diligence reviews of business combination
targets, approximately $30,000 in travel expenses, office expenses of $15,000
payable to Chardan Ventures LLC, and premiums for general and officer and
director insurance of approximately $11,000. Other than its initial public
offering and the pursuit of a business combination, Chardan has not engaged
in
any business to date. If Chardan does not consummate a business combination
by
February 10, 2007 (or, if a letter of intent, an agreement in principle or
a definitive agreement to complete a business combination has been executed
but
not consummated by February 10, 2007, by August 10, 2007), then, pursuant
to its certificate of incorporation, Chardan’s officers must take all actions
necessary to dissolve and liquidate Chardan within 60 days.
The
mailing address of Chardan’s principal executive office is Chardan North China
Acquisition Corporation, 625 Broadway, Suite 1111, San Diego, California 92101,
and its telephone number is (619) 795-4627.
HollySys
Holdings
HollySys
Holdings was established under the laws of the British Virgin Islands on
September 21, 2005. On September 20, 2005, the stockholders of HollySys Holdings
entered into a reorganization agreement to put 74.11% of the equity interests
in
Beijing HollySys and 60% of the equity interests in Hangzhou HollySys into
HollySys Holdings, effective June 30, 2005 for financial reporting purpose.
Subsequently, the stockholders of HollySys Holding amended the reorganization
agreement on December 30, 2005 due to the withdraw of one investor in Beijjing
HollySys who originally intended to acquire additional 20% interest in Hangzhou
Hollysys but was not able to consummate this transaction. The stockholders
of
Beijing HollySys and Hangzhou HollySys formed respective British Virgin Islands
companies to hold their equity interest in Beijing HollySys and Hangzhou
HollySys. HollySys Holdings entered into consignment agreements with these
British Virgin Islands companies, respectively, to obtain these individual
stockholders’ equity interests in Beijing HollySys. HollySys Holdings also
entered into share transfer agreements with two foreign investors in Hangzhou
HollySys to obtain their equity interests in Hangzhou HollySys. HollySys
Holdings itself does not engage in any operations.
The
three
HollySys Operating Companies are Beijing HollySys Co., Ltd., Hangzhou HollySys
Automation Co., Ltd. and Beijing HollySys Haotong Science & Technology
Development Co., Ltd. The three HollySys Operating Companies are organized
and
exist under the laws of the PRC. The HollySys Operating Companies conduct
various business operations, which include development, sale and service of
automation and control systems and components in China. The businesses of the
HollySys Operating Companies began in 1993.
In
accordance with the Chinese corporation law, which was effective July 1, 1994
and was abolished on December 31, 2005, the directors and corporate officers
of
a joint stock company may not transfer the shares they hold during their
incumbency. The amendment of the Chinese corporation law, which was effective
January 1, 2006, prohibits directors or corporate officers of a joint stock
company from transferring the ownership of more than 25% of the shares they
own
annually during their incumbency. However, it is permissible for record owners
of a Chinese corporation, who are subject to that restriction on transfer of
their stock, to consign to another all the equity interests and control of
their
stock while retaining only title. This includes the consignment of the record
owner’s voting, dispositive, dividend, meeting calling, proposal submission and
other rights, so that the consignee is for all intents and purposes the
functional owner, except for record ownership.
As
the
deputy chairman of the board and CEO of Beijing HollySys, Dr. Wang Changli
consigned his equity interests in Beijing HollySys Stock to HollySys Holdings
through a BVI company. The other stockholders (other than Team and OSCAF) in
Beijing HollySys, who were also the parties who had entered into the
voting-together agreements with Dr. Wang, consigned their equity interests
in
Beijing HollySys stock to HollySys Holdings through their respective BVI
companies.
After
the
reorganization effective June 30, 2005, HollySys Holdings held 60% of the
ownership interests in Hangzhou HollySys and 74.11% equity interest in Beijing
HollySys, respectively. Since the Chinese corporoation law has no restriction
on
transferring ownership of the shares held by directors and corporate officers
of
a limited liability company, the restriction on the equity interest held by
Dr.
Wang in Beijing HollySys will expire once Beijing HollySys has been changed
from
a joint stock company to a limited liability company. It is expected that the
process of changing from a joint stock company to a limited liability company
will be initiated by the stockholders of Beijing HollySys shortly after the
closing of this stock purchase transaction. This change may take up to six
months to complete, depending on the process of obtaining government
registration.
Counsel
for the HollySys Parties has opined that the consignment agreements are valid
and enforceable under the laws of the PRC so as to give HollySys Holdings the
equity interests and control of 74.11% of the issued and outstanding stock
of
Beijing HollySys.
For
the
years ended June 30, 2004 and 2005, HollySys generated approximately $53.1
million and approximately $79.6 million in revenue, respectively,
principally from its sales of automation systems and equipment to Chinese
customers in the power generation and heavy industry sectors.
The
HollySys Operating Companies introduced their new platform technology in 2004,
HOLLiAS. This platform consists of several modules, each of which can deliver
a
range of functions independently or can be integrated into an enterprise wide
automation and control system. The components of the system were designed to
enable HollySys to participate effectively in the most actively growing sectors
of the Chinese economy, including general industrial activity, nuclear and
fossil fuel power generation, rail transportation and emerging Chinese
industries, such as pharmaceutical manufacture and food processing. HollySys
also anticipates entering international markets, based on what it perceives
to
be products that are comparable to those of other automation companies but
selling at prices that will give it a competitive advantage.
The
current management of the HollySys Operating Companies is led by Dr. Wang
Changli, who will become the chief executive officer of HLS and will continue
to
operate the HollySys Operating Companies. Dr. Wang and Madame Qiao Li, the
current chairman of HollySys, will become two of the nine-person board of
directors of HLS. Kerry Propper, a current director and officer of Chardan,
and
Mr. Sun Dongying also will become directors of HLS. The remaining five director
positions will be filled by persons selected by the existing directors, with
consideration being given to meeting the requirements of having directors who
are both independent and financially literate.
The
mailing address of HollySys’ principal executive offices is 19 Jiancaicheng
Middle Road, Xisangi, Haidian District, Beijing China 100096, and its telephone
number is (86) 10-82922200.
The
Business Combination
The
stock
purchase agreement provides for Chardan to form a wholly owned subsidiary under
the laws of the British Virgin Islands, under the name “HLS Systems
International Limited” (“HLS”). At the time of closing of the stock purchase
agreement, Chardan will merge with and into HLS for the purpose of
redomestication out of the United States to secure future tax benefits and
greater corporate flexibility to structure the business of HollySys within
China
and effect acquisitions and reorganizations under Chinese law. Simultaneously
with the Redomestication Merger, HLS will acquire all of the issued and
outstanding stock of HollySys Holdings, gaining control of the three HollySys
Operating Companies pursuant to existing stock consignment agreements, dated
December 30, 2005, and share transfer agreements dated January 12, 2006 between
HollySys Holdings and the stockholders of the HollySys Operating Companies.
Following consummation of the stock purchase agreement and the Redomestication
Merger, HollySys Holdings will continue as the surviving company and owner
of
the stated interests in the HollySys Operating Companies. Pursuant to the
Redomestication Merger, all of the Chardan common stock held by Chardan’s
stockholders will be converted into common stock in HLS on a one-to-one basis
and the outstanding warrants issued by Chardan will be assumed by
HLS.
Under
the
stock purchase agreement, the HollySys Stockholders and their designees will
be
paid an aggregate of $30,000,000 in cash and will receive an aggregate of
23,500,000 shares of HLS common stock for all the outstanding common stock
of
HollySys Holdings. Chardan will defer paying a portion of the cash payment
(at
least $3 million, and possibly as much as $7 million, depending on the amount
of
funds remaining in the trust account in the event that any of Chardan’s
stockholders exercise their conversion rights) until HLS generates positive
cash
flow of at least twice the deferred amount or HLS receives at least
$60 million of additional financing.
As
additional consideration, the HollySys Stockholders and their designees will
be
issued an aggregate of 2,000,000 shares of common stock of HLS for each of
the
next four years if, on a consolidated basis, HLS generates after-tax profits
(excluding after-tax operating profits from any subsequent acquisitions of
securities that have a dilutive effect) of at least the following
amounts:
|
Year
ending June 30,
|
After-Tax
Profit
|
||
|
2007
|
$23,000,000
|
||
|
2008
|
$32,000,000
|
||
|
2009
|
$43,000,000
|
||
|
2010
|
$61,000,000
|
Chardan
and the HollySys Stockholders plan to complete the stock purchase promptly
after
the Chardan special meeting, provided that:
|
·
|
Chardan’s
stockholders have approved the stock purchase agreement and the
Redomestication Merger proposals;
|
|
·
|
holders
of less than 20% of the shares of common stock issued in Chardan’s initial
public offering vote against the stock purchase proposal and demand
conversion of their shares into cash;
and
|
|
·
|
the
other conditions specified in the stock purchase agreement have been
satisfied or waived.
|
The
Stock Purchase Agreement
The
stock
purchase agreement is included as an annex to this proxy statement/prospectus.
We encourage you to read the stock purchase agreement. It is the legal document
that governs the stock purchase and the other transactions contemplated by
the
stock purchase agreement. It is also described in detail elsewhere in this
proxy
statement/prospectus.
The
Chardan Stock Option Plan
The
stock
option plan reserves 3,000,000 shares of Chardan common stock for issuance
in
accordance with the plan’s terms. Chardan does not intend to grant any options
or other awards under this plan; instead, the plan will be available for use
by
the Board of Directors of HLS following the Redomestication Merger. The purpose
of the stock option plan is to enable Chardan (or HLS following the
Redomestication Merger) to offer its employees, officers, directors and
consultants whose past, present and/or potential contributions have been, are
or
will be important to the success of the company, an opportunity to acquire
a
proprietary interest in Chardan (or HLS). The various types of awards that
may
be provided under the stock option plan will enable Chardan to respond to
changes in compensation practices, tax laws, accounting regulations and the
size
and diversity of its business. Upon the Redomestication Merger, HLS will assume
the plan and it and will be administered by the board of directors of HLS using
the common stock of HLS instead of Chardan common stock.
The
stock
option plan is included as an annex to this proxy statement/prospectus. We
encourage you to read the stock option plan in its entirety.
Management
After
the
consummation of the stock purchase and of the Redomestication Merger, the board
of directors of the surviving corporation will be Dr. Wang Changli, Madame
Qiao
Li, Kerry S. Propper, Sun Dongying, and five independent directors selected
by
the existing board members.
Each
of
Madame Qiao Li and Dr. Wang Changli will enter into a three-year employment
agreement with HollySys Holdings. Madame Qiao will be employed as Chairman,
and
Dr. Wang will be chief executive officer.
Special
Meeting of Chardan ’s Stockholders
The
special meeting of the stockholders of Chardan will be held at _____ a.m.,
Pacific time, on ____________, 2006, at Chardan’s offices at 625 Broadway, Suite
1111, San Diego, California, 92101 to approve the stock purchase, the
Redomestication Merger and the stock option plan proposals.
Approval
of the HollySys Stockholders
All
of
the HollySys Stockholders have approved the stock purchase proposal and the
transactions contemplated thereby by virtue of the execution of the stock
purchase agreement.
Voting
Power; Record Date
You
will
be entitled to vote or direct votes to be cast at the special meeting if you
owned shares of Chardan common stock at the close of business on ____________,
2006, which is the record date for the special meeting. You will have one vote
for each share of Chardan common stock you owned at the close of business on
the
record date. Chardan warrants do not have voting rights. On the record date,
there were __________ outstanding shares of Chardan common stock.
Vote
Required to Approve the Proposals
The
approval of the stock purchase agreement proposal will require the affirmative
vote of the holders of a majority of the outstanding shares of Chardan common
stock on the record date.
The
approval of the Redomestication Merger proposal will require the affirmative
vote of the holders of a majority of the outstanding shares of Chardan common
stock on the record date.
The
approval of the stock option plan proposal will require the affirmative vote
of
the holders of a majority of the shares represented and entitled to vote at
the
meeting.
Relation
of Proposals
The
stock
purchase will not be consummated unless the Redomestication Merger proposal
is
approved, and the Redomestication Merger will not be consummated unless the
stock purchase proposal is approved. The approval of the stock option plan
is
not a condition to consummation of either the stock purchase or the
Redomestication Merger proposals.
Conversion
Rights
Pursuant
to Chardan’s Certificate of Incorporation, a holder of shares of Chardan’s
common stock issued in its initial public offering may, if the stockholder
votes
against the stock purchase, demand that Chardan convert such shares into cash.
This demand must be made in writing at the same time that the stockholder votes
against the stock purchase proposal. If so demanded, Chardan will convert each
share of common stock into a pro rata portion of the trust account as of the
record date. If you exercise your conversion rights, then you will be exchanging
your shares of Chardan common stock for cash and will no longer own these
shares. You will be entitled to receive cash for these shares only if you
continue to hold these shares through the effective time of the stock purchase
and then tender your stock certificate to the combined company. If the stock
purchase is not completed, then these shares will not be converted into cash
at
that time.
The
stock
purchase will not be consummated if the holders of 20% or more of common stock
issued in Chardan’s initial public offering (1,150,000 shares or more) exercise
their conversion rights.
Appraisal
Rights
Appraisal
rights are available under the Delaware General Corporation Law for the
stockholders of Chardan in connection with the Redomestication Merger proposal.
The procedure to exercise appraisal rights is described in detail elsewhere
in
this proxy statement. For a more complete discussion of appraisal rights, see
Annex H.
Proxies
Proxies
may be solicited by mail, telephone or in person. If you grant a proxy, you
may
still vote your shares in person if you revoke your proxy at or before the
special meeting.
Stock
Ownership
On
the
record date, directors and executive officers of Chardan and their affiliates
(the “Management Shareholders”) beneficially owned and were entitled to vote
1,250,000 shares of Chardan’s common stock. In connection with its initial
public offering, Chardan and EarlyBirdCapital, Inc. entered into agreements
with
each of the Management Shareholders, pursuant to which each Management
Shareholder agreed to vote his shares of Chardan common stock (other than shares
purchased in the open market) on the business combination in accordance with
the
majority of the votes cast by the holders of shares issued in connection with
the initial public offering.
Chardan
’s Board of Directors’ Recommendation
After
careful consideration, Chardan’s board of directors has determined unanimously
that the stock purchase plan proposal, the Redomestication Merger proposal,
and
the stock option proposal are fair to, and in the best interests of, Chardan
and
its stockholders. Chardan’s board has unanimously approved and declared
advisable the stock purchase proposal, the Redomestication Merger proposal
and
the stock option plan proposal, and unanimously recommends that you vote or
instruct your vote to be cast “FOR” the adoption of the stock purchase proposal,
the Redomestication Merger proposal, and the stock option plan proposal. The
board of directors did not obtain a fairness opinion.
Interests
of Chardan Directors and Officers in the Stock Purchase
When
you
consider the recommendation of Chardan’s board of directors that you vote in
favor of adoption of the stock purchase proposal, you should keep in mind that
a
number of Chardan’s executives and members of Chardan’s board have interests in
the stock purchase agreement that are different from, or in addition to, your
interests as a stockholder. These interests include, among other
things:
|
·
|
if
the stock purchase is not approved and Chardan fails to consummate
an
alternative transaction within the time allotted pursuant to its
Certificate of Incorporation, Chardan will be required to liquidate.
In
such event, the shares of common stock held by Chardan’s officers and
directors will be worthless because Chardan’s officers, directors and
initial stockholders are not entitled to receive any liquidation
proceeds.
Additionally, any warrants held by such persons will expire worthless
in
the event of liquidation;
|
|
·
|
after
the completion of the stock purchase, Mr. Kerry Propper will serve as
a member of the board of directors of HLS;
and
|
|
·
|
after
the completion of the stock purchase, Chardan Capital, LLC, an affiliate
of Dr. Propper, Chardan’s Chairman, will provide a variety of ongoing
services to HollySys. Such services will be provided on a month-to-month
basis, terminable at will by HollySys without penalty, at a cost
to
HollySys of $30,000 per month. There is no written agreement governing
the
services to be provided, which will be on a non-exclusive basis and
include advice and help in meeting US public company reporting
requirements and accounting standards, Sarbanes-Oxley compliance,
corporate structuring and development, stockholder relations, corporate
finance and operational capitalization and such other similar services
as
requested and agreed to by Chardan Capital, LLC
.
|
Conditions
to the Completion of the Stock Purchase
Each
of
Chardan’s and the HollySys Stockholders’ obligation to effect the stock purchase
is subject to the satisfaction or waiver of specified conditions, including
the
following:
Conditions
to Chardan’s and the HollySys Stockholders’
obligations
|
·
|
Approval
by Chardan’s stockholders of the stock purchase and Redomestication Merger
proposals;
|
|
·
|
the
absence of any order or injunction preventing consummation of the
stock
purchase;
|
|
·
|
the
absence of any suit or proceeding by any governmental entity or any
other
person challenging the stock purchase or seeking to obtain from the
HollySys Parties or Chardan any
damages;
|
|
·
|
at
Chardan’s stockholders’ meeting, holders of less than 1,150,000 shares of
common stock issued in Chardan’s initial public offering, vote against the
stock purchase proposal and demand that Chardan convert their shares
into
a pro rata portion of the trust account;
and
|
|
·
|
Certain
key members of the management team of the HollySys Operating Companies
will have entered into employment agreements in form and substance
acceptable to Chardan, providing, among other things, for a term
of three
years at compensation levels in effect prior to the closing of the
stock
purchase and including intellectual property assignment and
non-competition provisions to be in effect for a period of two years
following termination of
employment.
|
Conditions
to Chardan’s obligations
|
·
|
the
HollySys Stockholders’ representations and warranties that are qualified
as to materiality must be true and correct in all respects, and those
not
qualified as to materiality must be true and correct in all material
respects, as of the date of completion of the stock purchase, except
representations and warranties that address matters as of another
date,
which must be true and correct as of that other date, and Chardan
must
have received an officer’s certificate from the HollySys Stockholders to
that effect;
|
|
·
|
the
HollySys Stockholders must have performed in all material respects
all
obligations required to be performed by
them;
|
|
·
|
HollySys
Holdings will have acquired ownership or control of the three HollySys
Operating Companies;
|
|
·
|
the
HollySys Stockholders must have received all required and unconditional
approvals or consents of governmental authorities, and Chardan must
have
received written confirmation that such approvals and consents have
been
received;
|
|
·
|
Chardan
must have received a written opinion, dated as of the closing date,
from
Guantao Law Firm, counsel to the HollySys Parties relating to, among
other
things, the validity and enforceability of the stock consignment
agreements;
|
|
·
|
there
must not have occurred since the date of the stock purchase agreement
any
HollySys Material Adverse Effect, as defined in the stock purchase
agreement; and
|
|
·
|
the
Proxy Statement/Prospectus Information, as defined in the stock purchase
agreement, accurately describes HollySys, the HollySys Operating
Companies
and the business in which they are engaged, and the HollySys Stockholders,
and the HollySys Proxy Statement/Prospectus Information does not
contain
any untrue statement of a material fact or omit to state a material
fact
necessary in order to make the statements in the HollySys Proxy
Statement/Prospectus Information not
misleading.
|
Conditions
to the HollySys Stockholders’ obligation
|
·
|
Chardan’s
representation and warranty regarding the compliance of the stock
purchase
agreement and the agreements contemplated by the stock purchase agreement
with the applicable provisions in Chardan’s Certificate of Incorporation
must be true and correct in all respects, as of the date of completion
of
the stock purchase;
|
|
·
|
Chardan
must have performed in all material respects all obligations required
to
be performed by them under the stock purchase agreement;
and
|
|
·
|
there
must not have occurred since the date of the stock purchase agreement
any
Chardan Material Adverse Effect, as defined in the stock purchase
agreement.
|
No
Solicitation
The
stock
purchase agreement contains detailed provisions prohibiting each of Chardan
and
the HollySys Stockholders from seeking an alternative transaction. These
covenants generally prohibit Chardan and the HollySys Stockholders, as well
as
their officers, directors, subsidiaries, employees, agents and representatives,
from taking any action to solicit an alternative acquisition proposal. The
stock
purchase agreement does not, however, prohibit Chardan from considering an
unsolicited bona fide written superior proposal from a third party. The approval
of the stock purchase agreement by the HollySys Stockholders has already been
given, and no proposal from a third party will be effective to revoke or
withdraw that approval.
Termination,
Amendment and Waiver
The
stock
purchase agreement may be terminated at any time prior to the consummation
of
the stock purchase, whether before or after receipt of the Chardan stockholder
approval, as follows:
|
·
|
by
mutual written consent of Chardan and the HollySys
Stockholders;
|
|
·
|
by
either party if the other party amends a schedule and such amendment
or
supplement reflects a material adverse change in the condition, operations
or prospects of its business;
|
|
·
|
by
either party if the closing has not occurred by June 15, 2006 (unless
such
terminating party is in breach of any of its material covenants,
representations or warranties);
|
|
·
|
by
either party if the other party has breached any of its covenants
or
representations and warranties in any material respect and has not
cured
its breach within ten business days of the notice of an intent to
terminate, provided that the terminating party is itself not in
breach;
|
|
·
|
by
the HollySys Stockholders, if the board of directors of Chardan (or
any
committee thereof) shall have failed to recommend or withdraw or
modify in
a manner adverse to HollySys its approval or recommendation of the
stock
purchase agreement and any of the transactions contemplated
thereby;
|
|
·
|
by
Chardan if its board of directors shall have determined in good faith,
based upon the advice of outside legal counsel, that failure to terminate
the stock purchase agreement is reasonably likely to result in the
board
of directors breaching its fiduciary duties to stockholders by reason
of a
pending, unsolicited, bona fide written proposal for a superior
transaction; or
|
|
·
|
by
either party if, at the Chardan stockholder meeting, the stock purchase
agreement and the Redomestication Merger shall fail to be approved
and
adopted by the affirmative vote of the holders of Chardan’s common stock,
or 20% or more of the shares sold in Chardan’s initial public offering
request conversion of their shares into the pro rata portion of the
trust
account in accordance with the Chardan Certificate of
Incorporation.
|
The
HollySys Stockholders have no right to damages from Chardan or HLS and they
have
no right to any amount held in the trust account. The HollySys Stockholders
have
agreed not to make any claim against Chardan and HLS that would adversely affect
the business, operations or prospects of Chardan and HLS or the amount of the
funds held in the trust account.
Quotation
or Listing
Chardan’s
outstanding common stock, warrants and units are quoted on the Over-the-Counter
Bulletin Board. HLS intends to apply to have the HLS common stock, warrants
and
units quoted on the Nasdaq National Market at the consummation of the stock
purchase. The proposed Nasdaq symbols are HLSS, HLSSW and HLSSU. Seeking the
Nasdaq listing is an obligation of Chardan under the stock purchase agreement.
If Nasdaq listing is not achieved, management anticipates that the common stock,
warrants and units will continue to trade on the OTCBB.
Governance
after the Purchase
As
provided in the stock purchase agreement, the board of the combined company
will
initially consist of nine members, three of whom are designated by HollySys,
one
of whom is designated by Chardan and the others to be mutually determined (but
in all cases the other directors must satisfy the Nasdaq standards for
independence.)
Indemnification
by HollySys Stockholders
The
HollySys Stockholders have agreed to indemnify Chardan for breaches of their
representations, warranties and covenants.
Comparison
of Stockholders Rights
In
connection with the consummation of the stock purchase agreement, Chardan has
formed a wholly owned subsidiary under the laws of the British Virgin Islands,
under the name of HLS Systems International Ltd. Chardan will, if the stock
purchase proposal and Redomestication Merger proposal are approved, merge with
HLS, effectively changing its jurisdiction of incorporation from Delaware to
the
British Virgin Islands. Chardan’s common stock will be converted into common
stock of HLS. The rights of Chardan stockholders will change accordingly. A
comparison of the rights of stockholders under Delaware and British Virgin
Islands law is included elsewhere in this proxy
statement/prospectus.
Material
United States Federal Income Tax Consequences of the Stock
Purchase
Chardan
expects that the Redomestication Merger will qualify as a reorganization for
United States federal income tax purposes. Accordingly, no gain or loss should
be recognized by Chardan stockholders as a result of their exchange of Chardan
common stock for the common stock of HLS. Nevertheless, as a result of the
Redomestication Merger, Chardan will be treated for United States federal income
tax purposes as if it sold all of its assets to HLS. As a result, Chardan will
recognize gain (but not loss) as a result of the Redomestication Merger equal
to
the difference, if any, between the adjusted tax basis in Chardan’s assets and
such asset’s fair market value at the effective time of the Redomestication
Merger. Chardan will not, however, recognize any gain or loss as a result of
the
purchase of HollySys stock, pursuant to the Stock Purchase Agreement.
Accounting
Treatment
The
stock
purchase transaction will be accounted for as a recapitalization of HollySys
rather than as an acquisition. The financial statements of HLS will combine
the
historical statements of HollySys Holdings with the balance sheet of Chardan
from the effective date of the stock purchase transaction.
Regulatory
Matters
The
stock
purchase and the transactions contemplated by the stock purchase agreement
are
not subject to any federal or state regulatory requirement or approval,
including the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or HSR
Act,
except for filings necessary to effectuate the transactions contemplated by
the
stock purchase and Redomestication Merger proposals with the State of Delaware
and the British Virgin Islands.
Board
Solicitation
Your
proxy is being solicited by the board of directors of Chardan on each of the
three proposals being presented to the stockholders at the special
meeting.
SELECTED
HISTORICAL FINANCIAL
DATA
We
are
providing the following financial information to assist you in your analysis
of
the financial aspects of the stock purchase. We derived HollySys Holdings
historical information from the audited consolidated financial statements of
HollySys Holdings as of and for each of the years ended June 30, 2005, 2004
and
2003. The selected historical financial data for the years ended June 30, 2002
and 2001 were unaudited. We derived the Chardan historical information from
the
audited financial statements for the year ended December 31, 2005. The selected
financial data information is only a summary and should be read in conjunction
with each company’s historical consolidated financial statements and related
notes contained elsewhere herein. The historical results included below and
elsewhere in this proxy statement/prospectus are not indicative of the future
performance of HollySys, Chardan or the combined company resulting from the
business combination.
THE
HOLLYSYS HOLDINGS HISTORICAL FINANCIAL
DATA
|
Statement
of Income Data
|
Years
Ended June 30,
|
Six
Months Ended
December
31,
|
||||||||||||||||||||
|
2001
|
2002
|
2003
|
2004
|
2005
|
2004
|
2005
|
||||||||||||||||
|
Revenue
|
$
|
79,572,832
|
$
|
40,532,781
|
$
|
49,432,026
|
||||||||||||||||
|
Gross
margin
|
40.26
|
%
|
30.84
|
%
|
31.61
|
%
|
30.40
|
%
|
33.80
|
%
|
33.84
|
%
|
35.10
|
%
|
||||||||
|
Operating
income
|
3,294,500
|
3,262,957
|
3,515,563
|
7,431,631
|
13,875,018
|
7,104,805
|
9,270,825
|
|||||||||||||||
|
Subsidy
income
|
-
|
212,577
|
634,612
|
2,782
|
2,292,880
|
1,824,172
|
2,737,028
|
|||||||||||||||
|
Net
income
|
2,227,134
|
4,735,276
|
13,703,521
|
7,571,362
|
8,994,790
|
|||||||||||||||||
|
Weighted
average common shares
|
23,500,000
|
23,500,000
|
23,500,000
|
23,500,000
|
23,500,000
|
23,500,000
|
23,500,000
|
|||||||||||||||
|
At
June 30,
|
|||||||||||||||||||
|
Balance
Sheet Data
|
2001
|
2002
|
2003
|
2004
|
2005
|
December
31, 2005
|
|||||||||||||
|
Total
current assets
|
$
|
22,585,923
|
$
|
28,975,207
|
$
|
35,688,012
|
$
|
57,507,123
|
$
|
78,419,667
|
$
|
87,811,078
|
|||||||
|
Total
assets
|
70,006,021
|
96,064,098
|
110,651,178
|
||||||||||||||||
|
Total
current liabilities
|
45,723,094
|
56,081,886
|
58,321,445
|
||||||||||||||||
|
Long-term
liability
|
5,195,370
|
6,645,321
|
6,815,197
|
||||||||||||||||
|
Minority
Interest
|
1,890,980
|
2,478,779
|
3,388,627
|
4,425,419
|
6,334,435
|
8,705,593
|
|||||||||||||
|
Stockholders’
equity
|
14,662,138
|
27,002,456
|
36,808,943
|
||||||||||||||||
CHARDAN
HISTORICAL FINANCIAL INFORMATION
|
For
the Period
From
March 10, 2005 (Inception)
to
December 31, 2005
|
||||
|
Revenue
|
$
|
-
|
||
|
Interest
income on trust account
|
$
|
347,871
|
||
|
Net
loss
|
$
|
(101,742
|
)
|
|
|
Net
loss per share
|
$
|
(0.03
|
)
|
|
|
Total
assets (including cash deposited in trust account in 2005)
|
$
|
31,353,114
|
||
|
Common
shares subject to possible conversion
|
$
|
5,964,017
|
||
|
Stockholders’
equity
|
$
|
24,905,084
|
||
SELECTED
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The
stock
purchase transaction will result in those shareholders in HollySys Holdings
obtaining a majority of the voting interests in Chardan Sub (subsequently named
HLS Systems International Limited). Generally accepted accounting principles
require that the company whose shareholders retain the majority voting interest
in a combined business be treated as the acquirer for accounting purposes.
Since
Chardan does not have any assets with operating substance except cash, the
transaction has been accounted for as reorganization and recapitalization of
HollySys Holdings. The cash of $30 million to be paid to the shareholders of
HollySys Holdings will be accounted for as a capital distribution. The stock
purchase transaction utilizes the capital structure of Chardan and the assets
and liabilities of HollySys Holdings are recorded at historical cost. Although
HollySys Holdings will be deemed to be the acquiring company for accounting
and
financial reporting purposes, the legal status of Chardan Sub (subsequently
named HLS Systems International Limited) as the surviving corporation will
not
change.
We
have
presented below selected unaudited pro forma combined financial information
that
reflects the result of the stock purchase transaction and is intended to provide
you with a better picture of what our businesses might have looked like had
they
actually been combined. The combined financial information may have been
different had the companies actually been combined. The selected unaudited
pro
forma combined financial information does not reflect the effect of asset
dispositions, if any, or cost savings that may result from the stock purchase.
You should not rely on the selected unaudited pro forma combined financial
information as being indicative of the historical results that would have
occurred had the companies been combined or the future results that may be
achieved after the stock purchase. The following selected unaudited pro forma
combined financial information has been derived from, and should be read in
conjunction with, the unaudited pro forma condensed combined financial
statements and related notes thereto included elsewhere in this proxy
statement/prospectus.
|
Year
Ended December 31, 2005
|
|||||||
|
Assuming
Maximum
Approval
|
Assuming
Minimum
Approval
|
||||||
|
Revenue
|
$
|
88,472,077
|
$
|
88,472,077
|
|||
|
Net
income
|
14,721,636
|
14,692,681
|
|||||
|
Net
income per share
|
0.52
|
0.53
|
|||||
|
Total
assets
|
$
|
114,830,385
|
$
|
112,812,737
|
|||
|
Long-term
debt
|
6,815,197
|
6,815,197
|
|||||
|
Stockholders’
equity
|
37,764,439
|
31,714,027
|
|||||
COMPARATIVE
PER SHARE INFORMATION
The
following table sets forth selected historical per share information of HollySys
and Chardan and unaudited pro forma combined per share ownership information
of
HollySys and Chardan after giving effect to the stock purchase proposal of
HollySys, which includes control of the HollySys Operating Companies and the
merger between the Chardan and HLS, assuming a maximum level and a minimum
level
of approval of the stock purchase by Chardan stockholders who exercise their
conversion and/or appraisal right. The stock purchase transaction will be
accounted for as a recapitalization of HollySys.
You
should read this information in conjunction with the selected historical
financial information, included elsewhere in this proxy statement/prospectus,
and the historical financial statements of HollySys and Chardan and related
notes that are included elsewhere in this proxy statement/prospectus. The
unaudited HollySys and Chardan pro forma combined per share information is
derived from, and should be read in conjunction with, the Unaudited Pro Forma
Combined Financial Information and related notes included elsewhere in this
proxy statement/prospectus. The historical per share information of HollySys
Holdings was derived from its audited financial statements as of and for the
years ended June 30, 2004 and 2005.
The
unaudited pro forma combined per share information does not purport to represent
what the actual results of operations of HollySys and Chardan would have been
had the companies been combined or to project the HollySys and Chardan results
of operations that may be achieved after the stock purchase.
|
Number
of shares of common
stock
assumed to be issued in stock purchase:
|
HollySys
|
Chardan
(1) (2)
|
Combined
Company (2)
|
|||||||
|
Assuming
maximum approval
|
23,500,000
|
7,000,000
|
30,500,000
|
|||||||
|
77.05
|
%
|
22.95
|
%
|
100
|
%
|
|||||
|
Assuming
minimum approval
|
23,500,000
|
5,850,575
|
29,350,575
|
|||||||
|
80.07
|
%
|
19.93
|
%
|
100
|
%
|
|||||
|
Net
income (loss) per share - historical
on
weighted average basis
|
||||||||||
|
Year
ended June 30, 2004:
|
$
|
0.20
|
||||||||
|
Year
ended June 30, 2005:
|
0.58
|
|||||||||
|
Year
ended December 31, 2005
|
(0.03
|
)
|
||||||||
|
Net
income per share - pro forma
on
weighted average basis - diluted
|
||||||||||
|
under
maximum approval assumption
|
$
|
0.52
|
||||||||
|
under
minimum approval assumption
|
$
|
0.53
|
||||||||
|
Net
assets at book value per share - December 31, 2005
(3)
|
$
|
4.26
|
$
|
1.08
|
||||||
|
Net
assets at book value per share - June 30, 2005
|
$
|
1.57
|
||||||||
Notes:
(1)
Operations
of Chardan are for the period from March 10, 2005 (inception) to December 31,
2005.
(2)
Historical
per share amounts for Chardan were determined based upon the actual weighted
average shares outstanding at Decemeber 31, 2005 and combined pro forma per
share amounts for Chardan and HollySys were determined based upon the assumed
number of shares to be issued under the two different levels of
approval.
(3)
Calculated
based on the minimum approval, to record refund of funds ($5,964,017 plus
$86,395 for related interest) to dissenting stockholders
MARKET
PRICE INFORMATION
Chardan’s
common stock, warrants and units are each quoted on the Over-the-Counter
Bulletin Board under the symbols CNCA, CNCAW and CNCAU, respectively. Chardan’s
units commenced public trading on August 5, 2005 and its common stock and
warrants commenced public trading on August 31, 2005. The closing price for
each
share of common stock, warrant and unit of Chardan on February 1, 2006, the
last
trading day before announcement of the execution of the stock purchase agreement
was $6.78, $2.82 and $12.25, respectively.
In
connection with the stock purchase, HLS intends to apply for the quotation
of
the combined company’s common stock, warrants and units on the Nasdaq National
Market. The proposed symbols are HLSS, HLSSW and HLSSU. Management anticipates
that, if Nasdaq approves this listing, it will be concurrent with the
consummation of the Redomestication Merger. If the listing on Nasdaq is not
finally approved, management expects that the common stock, warrants and units
will continue to trade on the OTCBB. Currently there is no trading market for
any securities of HLS, and there can be no assurance that a trading market
will
develop.
The
table
below sets forth, for the calendar quarters indicated, the high and low bid
prices of the Chardan common stock, warrants and units as reported on the
Over-the-Counter Bulletin Board. The over-the-counter market quotations reported
below reflect inter-dealer prices, without markup, markdown or commissions
and
may not represent actual transactions.
|
Over-the-Counter
Bulletin Board
|
|||||||||||||||||||
|
Chardan
Common
Stock
|
Chardan
Warrants
|
Chardan
Units
|
|||||||||||||||||
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
||||||||||||||
|
2005
Third Quarter
|
$
|
6.00
|
$
|
5.17
|
$
|
1.15
|
$
|
0.70
|
$
|
7.50
|
$
|
6.15
|
|||||||
|
2005
Fourth Quarter
|
$
|
5.75
|
$
|
5.15
|
$
|
1.86
|
$
|
1.01
|
$
|
9.30
|
$
|
7.20
|
|||||||
|
2006
First Quarter
(through
March 24, 2006)
|
$ | 12.50 |
$
|
5.74 | $ | 7.00 |
$
|
1.65 | $ | 26.25 |
$
|
9.10 | |||||||
Holders
As
of
February 13, 2006, there was one holder of record of the units, six holders
of
record of the common stock and one holder of record of the warrants. Chardan
believes that there are more than 400 beneficial holders of each of the
units, common stock and warrants.
It
is
anticipated that the number of holders of HLS units, common stock and warrants
after the Redomestication Merger will be approximately the same as the number
of
holders of Chardan common stock. Immediately thereafter the number of holders
of
common stock will be increased by six persons by the issuance of shares in
the
acquisition of HollySys Holdings.
Dividends
Chardan
has not paid any dividends on its common stock to date and does not intend
to
pay dividends prior to the completion of a business combination.
The
payment of dividends by HLS in the future will be contingent upon revenues
and
earnings, if any, capital requirements and general financial condition of
HollySys subsequent to completion of a business combination. The payment of
any
dividends subsequent to a business combination will be within the discretion
of
the then board of directors. It is the present intention of the board of
directors to retain all earnings, if any, for use in the business operations
and, accordingly, the board does not anticipate declaring any dividends in
the
foreseeable future.
RISK
FACTORS
You
should carefully consider the following risk factors, together with all of
the
other information included in this proxy statement/prospectus, before you decide
whether to vote or instruct your vote to be cast to adopt the stock purchase
proposal.
If
we
complete the acquisition of HollySys Holdings, HLS will be subject to a number
of risks. You should carefully consider the risks we describe below and the
other information included in this proxy statement/prospectus before you decide
how you want to vote on the stock purchase proposal. Following the closing
of
the stock purchase, the market price of our common stock could decline due
to
any of these risks, in which case you could lose all or part of your investment.
In assessing these risks, you should also refer to the other information
included in this proxy statement/prospectus, including our consolidated
financial statements and the accompanying notes. You should pay particular
attention to the fact that we would become a holding company with substantial
operations in China. As a result, we would be subject to legal and regulatory
environments that differ in many respects from those of the U.S. Our business,
financial condition or results of operations could be affected materially and
adversely by any of the risks discussed below and any others not foreseen.
This
discussion contains forward-looking statements.
Risks
Related to the Business of HollySys
A
decrease in the rate of growth in Chinese industry and the Chinese economy
in
general may adversely affect the operating results of HollySys.
Industrial
companies operating in China are the principal current source of revenues for
HollySys. HollySys’ business has benefited in the past from the rapid expansion
of China’s industrial activity, which has created additional demand from
existing companies and led to the formation of numerous additional companies
that have need for HollySys’ products and services. China’s industrial expansion
has been fueled in large measure by international demand for the low-cost goods
that China is able to produce due to labor and other comparative advantages.
The
Chinese economy may not be able to sustain this rate of growth in the future,
and any reduction in the rate of China’s industrial growth or a shrinking of
China’s industrial base could adversely affect HollySys’ revenues. The resulting
increase in competition for customers might also cause erosion of profit margins
that HollySys has been able to achieve historically.
The
success of HollySys’ business depends heavily on securing a steady stream of new
customers.
HollySys’
average contract is worth approximately $100,000. While some of those contracts
are for upgrades and additions to existing control systems, most of them are
for
new installations. In order for HollySys’ business to continue to succeed and
grow, it needs to secure contracts with new customers on a regular basis.
HollySys may not be successful in securing new contracts.
HollySys’
plans for growth rely on a shift to sectors where the average contract size
is
much larger than it current average, and it may not be able to secure a
sufficient number of those contracts to meet its growth objectives.
While
the
principal focus of HollySys’ business until recently has been to provide
distributed control systems to industrial and manufacturing companies, its
plans
for growth include an increasing emphasis on railroad control systems and
nuclear power generation control systems. These sectors generally present fewer
business opportunities during a given period relative to the industrial and
manufacturing sectors. However, the average size of contracts in those sectors
tends to be much larger, and as a result, the competition for such contracts
is
substantial. HollySys may not be successful in entering these new markets and,
if it were unable to do so, its revenues and profits would decline, resulting
in
a decreased value of our stock.
A
lack of adequate engineering resources could cause HollySys’ business to
suffer.
One
of
the competitive advantages that HollySys’ business enjoys is the relatively low
cost of engineering staff compared to those of its Western and Japan-based
competitors. The plentiful supply of affordable engineering talent in China
is a
key element of HollySys’ overall business strategy. However, if the available
supply of engineers were to be absorbed by competing demands, then the cost
of
hiring, training and retaining capable engineers would likely increase. This
could result in a reduction in HollySys’ profitability and business prospects,
or could even cause a change in its business strategy.
HollySys
does not have long-term purchase commitments from its
customers.
HollySys
is engaged in the design, production and installation of automation and process
control systems. As a result, its revenues result from numerous individual
contracts that, once completed, typically produce only a limited amount of
ongoing revenues for maintenance and other services. Furthermore, customers
may
change or delay or terminate orders for products without notice for any number
of reasons unrelated to us, including lack of market acceptance for the products
to be produced by the process our system was designed to control. As a result,
in order to maintain and expand its business, HollySys must be able to replenish
the orders in its pipeline on a continuous basis. It is possible that some
of
its potential customers could choose the products of its competitors. Should
they do so, HollySys would suffer a decline in revenues and profitability.
HollySys
faces intense competition, and many of its competitors have substantially
greater resources than we do.
HollySys
operates in a very competitive environment. It competes with many major
international and domestic companies, such as Honeywell, General Electric,
ABB,
Siemens, Emerson, and Hitachi. Many of its competitors are much better
established and more experienced than HollySys, have substantially greater
financial resources, operate in many international markets and are much more
diversified than HollySys. As a result, they are in a strong position to compete
effectively with HollySys by, for example, reducing their prices, which could
force HollySys to reduce its prices. These large competitors are also in a
better position than HollySys is to weather any extended weaknesses in the
market for their products. Other emerging companies or companies in related
industries may also increase their participation in the automation and control
systems market, which would add to the competitive pressures that HollySys
faces.
The
growth of HollySys’ business depends on its ability to finance new products and
services.
Traditionally,
the automation and control systems business was relatively stable and slow
moving. Successive generations of products offered only marginal improvements
in
terms of functionality and reliability. However, the emergence of computers,
computer networks and electronic components as key elements of the systems
that
HollySys designs and builds has accelerated the pace of change in its industry.
Where there was formerly as much as a decade or even more between successive
generations of automation systems, the time between generations is now as little
as two to three years.
The
success of HollySys’ business depends in great measure on its ability to keep
pace with, or even lead, the changes that are occurring. Technological advances,
the introduction of new products, new designs and new manufacturing techniques
by its competitors could adversely affect its business unless it is able to
respond with similar advances. To remain competitive, HollySys must continue
to
incur significant costs in product development, equipment and facilities and
to
make capital investments. These costs may increase, resulting in greater fixed
costs and operating expenses than HollySys has incurred to date. As a result,
it
could be required to expend substantial funds for and commit significant
resources to the following:
|
·
|
Research
and development activities on existing and potential product
solutions;
|
|
·
|
Additional
engineering and other technical
personnel;
|
|
·
|
Advanced
design, production and test
equipment;
|
|
·
|
Manufacturing
services that meet changing customer
needs;
|
|
·
|
Technological
changes in manufacturing processes;
and
|
|
·
|
Expansion
of manufacturing capacity.
|
HollySys’
future operating results will depend to a significant extent on its ability
to
continue to provide new product solutions that compare favorably on the basis
of
time to market, cost and performance with competing third-party suppliers and
technologies. Its failure to increase net sales sufficiently to offset the
increased costs needed to achieve those advances would adversely affect its
operating results.
Products
HollySys manufactures may contain design or manufacturing defects, which could
result in reduced demand for its services and customer claims.
HollySys
manufactures products to its customers’ requirements, which can be highly
complex and may at times contain design or manufacturing errors or failures.
Any
defects in the products it manufactures, whether caused by a design,
manufacturing or component failure or error, may result in returns, claims,
delayed shipments to customers or reduced or cancelled customer orders. If
these
defects occur, HollySys will incur additional costs, and if they occur in large
quantity or frequently, HollySys may sustain additional costs, loss of business
reputation and legal liability.
HollySys
is in the process of entering market segments that pose substantial risk of
liability if its products fail to perform as designed.
While
not
insignificant, the risk of failure of HollySys’ products in the industrial
sector normally involves a limited extent of liability. For example, if the
controls for on industrial production batch process fail to operate properly,
HollySys’ customer could lose the batch in question. However, the risk of a
catastrophic failure is relatively small.
HollySys
is in the process of entering both the nuclear power generation and railway
control systems sectors. Each of these sectors poses a substantially higher
risk
of liability in the event of a system failure. For example, if the interlock
system designed to control rail traffic should fail, it could lead to a
collision with attendant loss of life and substantial financial liability.
Similarly, if the control systems for a nuclear power plant result in the
release of radioactive materials, the effects on human health and the
environment could involve substantial financial liability as compensation to
victims and to restore damage done to the environment.
HollySys
may not be able to obtain adequate insurance coverage to protect it and us
against these and other risks associated with its business. As a result, the
failure of any of its products could result in a liability that would seriously
impair the financial condition or even force it or us out of business.
HollySys
could become involved in intellectual property disputes.
HollySys’
business is based on a number of proprietary products and systems, some of
which
are patented, others of which it protects as trade secrets. HollySys expects
that its reliance on these proprietary products and systems will grow, as the
functionality of automation systems increases to meet customer demand and as
it
tries to open new markets for its products. If a third party should infringe
on
any of HollySys’ intellectual property rights, it may need to devote significant
time and financial resources to attempt to halt the infringement, and it may
not
be successful in such a dispute. Similarly, in the event of an infringement
claim against HollySys, it may be required to spend a significant amount of
time
and financial resources to resolve the claim. It may not be successful in
defending its position or negotiating an alternative. Any litigation could
result in substantial costs and diversion of its management resources and could
materially and adversely affect its business and operating results.
HollySys
may develop new products that may not gain market acceptance.
HollySys
operates in an industry characterized by increasingly frequent and rapid
technological advances, product introductions and new design and manufacturing
improvements. As a result, it must expend funds and commit resources to research
and development activities, possibly requiring additional engineering and other
technical personnel; purchasing new design, production, and test equipment;
and
enhancing its design and manufacturing processes and techniques. It may invest
in equipment employing new production techniques for existing products and
new
equipment in support of new technologies that fail to generate adequate returns
on the investment due to insufficient productivity, functionality or market
acceptance of the products for which the equipment may be used. HollySys could,
therefore, incur significant costs for design and manufacturing services for
new
product solutions that do not generate a sufficient return on that investment,
which would adversely affect its future operating results. HollySys’ future
operating results will depend significantly on its ability to provide timely
design and manufacturing services for new products that compete favorably with
design and manufacturing capabilities of third party suppliers.
If
HollySys is not able to apply new technology in its products or develop new
products, its sales will suffer.
HollySys
success depends, in significant part, on its ability to develop products and
services that customers will accept. It may not be able to develop successful
new products in a timely fashion. Its commitment to customizing products to
address particular needs of its customers could burden its resources or delay
the delivery or installation of its products. If there is a fundamental change
in its industry, some of HollySys’ products could become obsolete and it may
need to develop new products rapidly.
HollySys
plans to enter the international automation market may not prove
successful.
To
date
HollySys has conducted nearly all of its business within China. However, it
has
plans to enter international markets in the near future. While the manner in
which HollySys plans to do so will likely not involve large amounts of capital
and resources, it will require meaningful amounts of management time and
attention. HollySys’ products and its overall approach to the automation and
controls system business may not be accepted in other markets to the extent
needed to make that effort profitable. In addition, the additional demands
on
its management from these activities may detract from their efforts in the
domestic Chinese market, causing the operating results in its principal market
to be adversely affected.
HollySys
may not obtain the required certification to engage in the railway systems
market segment.
At
present there are only two Chinese companies that are certified to design and
produce traffic control systems for railway transportation. HollySys does not
yet have that certification, which is necessary for it to be able to provide
complete systems for that purpose independent of other parties. HollySys is
in
the process of obtaining that certification, and it expects to do so by the
end
of its current fiscal year (June 30 2006). However, it may not achieve that
certification in a timely manner or at all. Any delay in obtaining that
certification would postpone and reduce the anticipated revenues associated
with
its entry into that sector, and if it fails to obtain the certification it
would
lose the ability to provide products and services independently in that market.
The result would be an unfavorable effect on our overall operating results.
Expiration
of or changes to certain government incentives could have a material adverse
effect on HollySys’ operating results.
The
PRC government and various provincial governments have provided various
incentives to high technology companies in order to encourage development of
the
domestic high technology industry. Such incentives include reduced tax rates
and
other measures. For example, since HollySys is registered in a high technology
zone in Beijing and has been designated as a high technology company by the
Beijing Commission of Science and Technology, it is entitled to a preferential
enterprise income tax rate of 15% so long as it continues to operate in the
high
tech zone and maintains its high or new technology enterprise status. As these
tax benefits expire, the effective tax rate will increase significantly, and
any
increase in HollySys’ enterprise income tax in the future could have a material
adverse effect on our financial condition and results of
operations.
We
may not be able to secure financing needed for future operating needs on
acceptable terms, or on any terms at all.
From
time
to time, we may seek additional equity or debt financing to provide the capital
required to maintain or expand HollySys’ design and production facilities and
equipment and/or working capital, as well as to repay outstanding loans if
its
cash flow from operations is insufficient to do so. We cannot predict with
certainty the timing or amount of any such capital requirements. If such
financing is not available on satisfactory terms, we may be unable to expand
HollySys’ business or to develop new business at the rate desired, and its
operating results may suffer.
Failure
to manage HollySys’ growth effectively could adversely affect its
operations.
HollySys
has increased the number of its manufacturing and design programs and intends
to
expand further the number and diversity of its programs. It may also increase
the number of its manufacturing locations. HollySys’ ability to manage its
planned growth effectively will require it to:
enhance
its quality, operational, financial and management systems;
expand
its facilities and equipment; and
successfully
hire, train and motivate additional employees, including the engineering and
technical personnel necessary to operate its production facilities.
An
expansion and diversification of HollySys product range, manufacturing and
sales
will result in increases in its overhead and selling expenses. It may also
be
required to increase staffing and other expenses as well as our expenditures
on
plant, equipment and property in order to meet the anticipated demand of its
customers. Customers, however, generally do not commit to firm production
schedules for more than a short time in advance. Any increase in expenditures
in
anticipation of future orders that do not materialize would adversely affect
its
profitability. Customers also may require rapid increases in design and
production services that would place an excessive short-term burden on HollySys’
resources and reduce its profitability.
HollySys
may not be able to retain, recruit and train adequate management and production
personnel.
HollySys
success is dependent, to a large extent, on its ability to retain the services
of its executive management personnel, who have contributed to its growth and
expansion. The executive directors play an important role in the operations
of
HollySys and the development of its new products. Accordingly, the loss of
their
services, in particular Dr. Wang Changli, without suitable replacement, will
have an adverse affect on its operations and future prospects.
In
addition, HollySys’ continued operations are dependent upon its ability to
identify and recruit adequate engineering and production personnel in China.
It
requires trained graduates of varying levels and experience and a flexible
work
force of semi-skilled operators. With the current rate of economic growth in
China, competition for qualified personnel will be substantial. The favorable
employment climate may not continue and the wage rates HollySys must offer
to
attract qualified personnel may not enable it to remain competitive
internationally.
Risks
Related to International Operations
If
the PRC does not continue its policy of economic reforms, it could, among other
things, result in an increase in tariffs and trade restrictions on products
HollySys produces or sells.
The
PRC
government has been reforming its economic system since the late 1970s. The
economy of the PRC has historically been a nationalistic, “planned economy,”
meaning it has functioned and produced according to governmental plans and
pre-set targets or quotas.
However,
in recent years, the PRC government has implemented measures emphasizing the
utilization of market forces for economic reform and the reduction of state
ownership in business enterprises. HollySys’ business has benefited greatly from
that new outlook. Although we believe that the changes adopted by the PRC
government have had a positive effect on the economic development of the PRC,
additional changes still need to be made. For example, a substantial portion
of
productive assets in the PRC are still owned by government entities.
Additionally, governments continue to play a significant role in regulating
industrial development. We cannot predict the timing or extent of any future
economic reforms that may be proposed.
A
recent
positive economic change has been the PRC’s entry into the World Trade
Organization, the global international organization dealing with the rules
of
trade between nations. Many observers believe that the PRC’s entry will
ultimately result in a reduction of tariffs for industrial products, a reduction
in trade restrictions and an increase in international trade with China.
However, the PRC has not yet fully complied with all of obligations that it
must
meet prior to being admitted as a full member of the WTO, including fully
opening its markets to goods from other countries, currency exchange
requirements and other measures designed to ease the current trade imbalance
that China has with many of its trading partners. If the scheduled actions
to
rectify these problems are not completed, trade relations between China and
some
of its trading partners may be strained. While the majority of HollySys’
business currently is conducted solely within China, this may have a negative
impact on China’s economy generally, which would adversely affect its business.
It could also reduce or eliminate any benefits that HollySys hopes to achieve
by
expanding our business internationally.
The
Chinese government could change its policies toward, or even nationalize,
private enterprise, which could harm HollySys’ operations.
Over
the
past several years, the Chinese government has pursued economic reform policies,
including the encouragement of private economic activities and decentralization
of economic regulation. The Chinese government may not continue to pursue these
policies or may significantly alter them to HollySys’ detriment from time to
time without notice. Changes in policies by the Chinese government that result
in a change of laws, regulations, their interpretation, or the imposition of
high levels of taxation, restrictions on currency conversion or imports and
sources of supply could materially and adversely affect HollySys’ business and
operating results. The nationalization or other expropriation of private
enterprises by the Chinese government could result in the total loss of our
investment in China.
The
Chinese legal system may have inherent uncertainties that could materially
and
adversely impact HollySys’ ability to enforce the agreements governing its
operations.
The
performance of the agreements and the operations of HollySys’ factories are
dependent on its relationship with the local government in China. HollySys’
operations and prospects would be materially and adversely affected by the
failure of the local government to honor its agreements or an adverse change
in
the laws governing them. In the event of a dispute, enforcement of these
agreements could be difficult in China. China tends to issue legislation which
is followed by implementing regulations, interpretations and guidelines that
can
render immediate compliance difficult. Similarly, on occasion, conflicts arise
between national legislation and implementation by the provinces that take
time
to reconcile. These factors can present difficulties in HollySys achieving
compliance. Unlike the U.S., China has a civil law system based on written
statutes in which judicial decisions have limited precedential value. The
Chinese government has enacted laws and regulations to deal with economic
matters such as corporate organization and governance, foreign investment,
commerce, taxation and trade. However, its experience in implementing,
interpreting and enforcing these laws and regulations is limited, and HollySys
ability to enforce commercial claims or to resolve commercial disputes in China
is therefore unpredictable. Agencies of the Chinese government may exercise
considerable discretion over these matters, and forces and factors unrelated
to
the legal merits of a particular matter or dispute may influence their
determination.
Because
our operations will be international, we will be subject to significant
worldwide political, economic, legal and other uncertainties.
Upon
consummation of the proposed transaction, we will be incorporated in the BVI
and
will have our principal operations in China. Because HollySys manufactures
all
of its products in China, substantially all of the net book value of our total
consolidated fixed assets will be located there. While until now nearly all
of
HollySys’ sales have been within China, it is expanding its efforts to sell them
internationally as well. As a result, HollySys expects to have receivables
from
and goods in transit outside of China in the near future. Protectionist trade
legislation in the U.S. or other countries, such as a change in export or import
legislation, tariff or duty structures, or other trade policies, could adversely
affect HollySys’ ability to sell products in these markets, or even to purchase
raw materials or equipment from foreign suppliers. [Moreover, we are subject
to
a variety of U.S. laws and regulations, changes to which may affect our ability
to transact business with certain customers or in certain product categories.]
HollySys
is also subject to numerous national, state and local governmental regulations,
including environmental, labor, waste management, health and safety matters
and
product specifications. It is subject to laws and regulations governing its
relationship with its employees, including: wage and hour requirements, working
and safety conditions, citizenship requirements, work permits and travel
restrictions. These include local labor laws and regulations, which may require
substantial resources for compliance. HollySys is subject to significant
government regulation with regard to property ownership and use in connection
with its leased facilities in China, import restrictions, currency restrictions
and restrictions on the volume of domestic sales and other areas of regulation,
all of which impact its profits and operating results.
Fluctuation
of the Renminbi could materially affect our financial condition and results
of
operations.
The
value
of the Renminbi, the main currency used in the PRC, fluctuates and is affected
by, among other things, changes in the PRC’s political and economic conditions.
The conversion of Renminbi into foreign currencies such as the dollar has been
generally based on rates set by the People’s Bank of China, which are set daily
based on the previous day’s interbank foreign exchange market rates and current
exchange rates on the world financial markets. The official exchange rate had
remained stable over the past several years. However, the PRC recently adopted
a
floating rate with respect to the Renminbi, with a 0.3% fluctuation. As a
result, the exchange rate of the Renminbi recently rose to 8.11 against the
dollar, amounting to a 2% appreciation of the Renminbi. Most of HollySys’
business is currently conducted inside of China using the Renminbi. As a result,
changes in the exchange rate between it and other currencies should not have
a
material adverse effect on HollySys’ current business. In fact, to the extent
that the Renminbi appreciates against the dollar over time, which is widely
anticipated, the result will be to increase HollySys’ earnings when stated in
dollar terms.
However,
HollySys is planning to increase the amount of business that it conducts
internationally, and this floating exchange rate, and any fluctuation in the
value of the Renminbi that may result, could have various adverse effects on
its
business.
Changes
in foreign exchange regulations
in
the PRC may affect HollySys’ ability to pay dividends in foreign currency or
conduct other foreign exchange business.
Renminbi,
or RMB, is not presently a freely convertible currency, and the restrictions
on
currency exchanges may limit our ability to use revenues generated in RMB to
fund our business activities outside the PRC or to make dividends or other
payments in U.S. dollars. The PRC government strictly regulates conversion
of
RMB into foreign currencies. Over the years, foreign exchange regulations in
the
PRC have significantly reduced the government’s control over routine foreign
exchange transactions under current accounts. In the PRC, the State
Administration for Foreign Exchange (“SAFE”) regulates the conversion of the RMB
into foreign currencies. Currently, Foreign Invested Enterprises are required
to
apply for “Foreign Exchange Registration Certificates.” Hangzhou HollySys is a
Foreign Invested Enterprise that has obtained the registration certification,
and with such registration certification, which needs to be renewed annually,
it
is allowed to open foreign currency accounts including “current account” and
“capital account.” Currently, conversion within the scope of the “current
account” (e.g. remittance of foreign currencies for payment of dividends, etc.)
can be effected without requiring the approval of SAFE. However, conversion
of
currency in the “capital account” (e.g. for capital items such as direct
investments, loans, securities, etc.) still requires the approval of SAFE.
In
accordance with the existing foreign exchange regulations in the PRC, Hangzhou
HollySys will be able to pay dividends in foreign currencies, without prior
approval from the SAFE, by complying with certain procedural requirements.
After
the consummation of the acquisition of Beijing HollySys stock by HollySys
Holdings from the HollySys Stockholders, Beijing HollySys will change from
a
domestic company to a Foreign Invested Enterprise that is qualified to apply
for
the “Foreign Exchange Registration Certificate.”
The
current foreign exchange measures may be changed in a way that will make payment
of dividends and other distributions outside of China more difficult or
unlawful. In that case, if HollySys intended to distribute profits outside
of
the PRC, it might not be able to obtain sufficient foreign exchange to do
so.
In
addition, on October 21, 2005, SAFE promulgated Notice 75, Notice on Issues
concerning Foreign Exchange Management in PRC Residents’ Financing and Return
investments through Overseas Special Intention Company. Notice 75 provides
that
PRC residents must apply for Foreign Exchange Investment Registration before
establishing or controlling an OSIC, which is defined by Notice 75 as a foreign
enterprise directly established or indirectly controlled by PRC residents for
foreign equity capital financing with their domestic enterprise assets and
interests. Notice 75 further requires that PRC residents must process the
modification of foreign investment exchange registration for the interests
of
net assets held by PRC residents in an OSIC and its alteration condition, if
PRC
residents contributed their domestic assets or shares into the OSIC, or
processed foreign equity capital financing after contributing their domestic
assets or shares into the OSIC.
Pursuant
to Notice 75, PRC residents are prohibited, among other things, from
distributing profits or proceeds from a liquidation, paying bonuses, or
transferring shares of the OSIC outside of the PRC if the PRC residents have
not
completed or do not maintain the Foreign Investment Exchange Registration.
We
are subject to various tax regimes.
Upon
consummation of the stock purchase transaction, we will have subsidiaries and/or
operations in the PRC, and the BVI, and we may soon have operations in other
jurisdictions. As a result, we will be subject to the tax regimes of these
countries. Any change in tax laws and regulations or the interpretation or
application thereof, either internally in one of those jurisdictions or as
between those jurisdictions, may adversely affect our profitability and tax
liabilities.
Because
Chinese law will govern almost all of HollySys material agreements, we may
not
be able to enforce our legal rights within the PRC or elsewhere, which could
result in a significant loss of business, business opportunities, or capital.
Chinese
law will govern some of our material agreements after the share exchange. Our
PRC subsidiaries may not be able to enforce their material agreements, and
remedies may not be available outside of the PRC. The system of laws and the
enforcement of existing laws in the PRC may not be as certain in implementation
and interpretation as in the U.S. The Chinese judiciary is relatively
inexperienced in enforcing corporate and commercial law, leading to a higher
than usual degree of uncertainty as to the outcome of any litigation. The
inability to enforce or obtain a remedy under any of our future agreements
could
result in a significant loss of business, business opportunities or
capital.
Additionally,
substantially all of our assets will be located outside of the U.S. and most
of
our officers and directors will reside outside of the U.S. As a result, it
may
not be possible for investors in the U.S. to enforce their legal rights, to
effect service of process upon our directors or officers or to enforce judgments
of U.S. courts predicated upon civil liabilities and criminal penalties of
our
directors and officers under Federal securities laws. Moreover, we have been
advised that the PRC does not have treaties providing for the reciprocal
recognition and enforcement of judgments of courts with the U.S. Further, it
is
unclear if extradition treaties now in effect between the U.S. and the PRC
would
permit effective enforcement of criminal penalties of the Federal securities
laws.
It
will be extremely difficult to acquire jurisdiction and enforce liabilities
against our officers, directors and assets based in the PRC.
Because
most of our officers and directors will reside outside of the U.S., it may
be
difficult, if not impossible, to acquire jurisdiction over these persons in
the
event a lawsuit is initiated against us and/or our officers and directors by
a
shareholder or group of shareholders in the U.S. Also, because our executive
officers will likely be residing in the PRC at the time such a suit is
initiated, achieving service of process against such persons would be extremely
difficult. Furthermore, because the majority of our assets are located in the
PRC it would also be extremely difficult to access those assets to satisfy
an
award entered against us in U.S. court. Moreover, we have been advised that
the
PRC does not have treaties with the U.S. providing for the reciprocal
recognition and enforcement of judgments of courts.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
Most
PRC
companies historically have been less focused on establishing
Western
style management and financial reporting concepts and practices, as well as
in
modern banking, computer and other internal control systems. We may have
difficulty in hiring and retaining a sufficient number of qualified internal
control employees to work in the PRC. As a result of these factors, we may
experience difficulty in establishing management, legal and financial controls,
collecting financial data and preparing financial statements, books of account
and corporate records and instituting business practices that meet Western
standards.
Trade
barriers and taxes may have an adverse effect on HollySys’ business and
operations.
HollySys
may experience barriers to conducting business and trade in its targeted
emerging markets in the form of delayed customs clearances, customs duties
and
tariffs. In addition, it may be subject to repatriation taxes levied upon the
exchange of income from local currency into foreign currency, substantial taxes
of profits, revenues, assets and payroll, as well as value-added tax. The
markets in which HollySys plans to operate may impose onerous and unpredictable
duties, tariffs and taxes on its business and products, and there can be no
assurance that this will not have an adverse effect on its finances and
operations.
We
will depend upon contractual agreements with several shareholders of Beijing
HollySys in conducting our business through those entities, which may not be
as
effective in providing operational control as direct ownership and may be
difficult to enforce.
Several
of our shareholders own through contractual agreements, and for the benefit
of
our wholly-owned subsidiary, HollySys Holdings, majorities of the equity
interests in our PRC operating companies. While we do not have a majority
interest in Beijing HollySys, through these contractual agreements we enjoy
voting control and are entitled to the economic interests associated with the
stockholders’ equity interest in Beijing HollySys. These contractual agreements
may not be as effective in providing us with control over HollySys as direct
ownership because we rely on the performance of the respective stockholders
under the agreements. If those stockholders were to fail to perform their
respective obligations under the agreements, we may have to incur substantial
resources to enforce those agreements, and rely on legal remedies under
applicable law, which may not be effective.
While
we
believe that the ownership structure of HollySys Holdings and the contractual
agreements between the stockholders and HollySys Holdings do not violate
existing PRC laws, rules and regulations, there are, however, substantial
uncertainties regarding the interpretation and application of current or future
PRC laws or regulations, including but not limited to the laws and
regulations governing the validity and enforcement of these contractual
agreements. If we or our PRC operating companies are found to violate
existing or future PRC laws or regulations, the relevant regulatory
authorities will have broad discretion in dealing with such violations, which
would cause significant disruptions to our business operations or render us
unable to conduct our business operations and may materially adversely affect
our business, financial condition or results of operations.
Cessation
of or changes to certain government incentives may have a material adverse
effect on HollySys’ operating results.
The
Chinese government and various provincial governments have provided various
incentives to high technology companies in order to encourage development of
the
domestic high technology industry. Such incentives include reduced tax rates
and
other measures. HollySys is currently enjoying a reduction of income tax rates
under the central government and provincial government laws.
Beijing
HollySys is registered in a high-tech zone located in Beijing and has been
deemed as a high-tech company by the Beijing Commission of Science and
Technology. As a result, it is entitled to a preferential enterprise income
tax
rate of 15%, so long as it continues to operate in the high-tech zone and
maintains its high or new technology enterprise status.
Beijing
HollySys Haotong (Haotong) is also registered in a high-tech zone located
Beijing and has been deemed as a high-tech company by Beijing Commission of
Science and Technology. Therefore, Haotong is also entitled to the favorable
income tax rate at 15% so long as it continues to operate in the high-tech
zone
and maintains its high or new technology enterprise status as well. Under the
favorable 15% of corporate income tax rate, Haotong received a 100% exemption
of
income tax for three years ending December 31, 2003 and a 50% exemption of
income tax for three years from January 1, 2004 to December 31,
2006.
Hangzhou
HollySys is registered as foreign investment enterprise conducting production
functions. Under the provisional regulations, for Hangzhou HollySys, the 30%
income tax rate belonging to the central government was reduced to 24%, and
the
3% income tax rate belonging to the local government was reduced to 2.4%.
Accordingly, the applicable income tax of Hangzhou HollySys was 26.4%. In
accordance with the foreign investment enterprise income tax law, Hangzhou
HollySys has entitled to receive a 100% exemption of income tax for two years
and a 50% exemption of income tax for the next three years beginning the first
year Hangzhou HollySys generates a taxable income on a continuing basis. During
the fiscal years ended June 30, 2004 and 2005, Hangzhou HollySys was still
under
100% exemption status.
As
long
as Beijing HolllySys and Haotong continue to operate in the high-tech zone
and
maintain their high or new technology enterprise status, they will be entitled
to 15% of corporate income tax rate. Any loss or reduction of the favorable
tax
rates would affect HollySys’ operating results.
Normally,
domestic-invested enterprises in China are subject to a 33% income tax rate.
The
Chinese government intends to eliminate differences between the applicable
tax
rates of domestic and foreign-invested enterprises, but the schedule for the
unification of tax rates has not yet been established. If this happens, it
may
have a material adverse effect on Hangzhou HollySys.
As
these
tax benefits expire, the effective tax rate will increase significantly, and
any
increase in HollySys’ enterprise income tax in the future could have a material
adverse effect on our financial condition and results of
operations.
Cessation
of government subsidies may have an adverse effect on HollySys’ operating
results.
T
he
local
government in Beijing and Hangzhou have provided subsidies from value added
tax
collections to encourage Beijing HollySys’, Haotong’s and Hangzhou HollySys’
research and development efforts and other subsidies to Beijing HollySys for
enterprise development purposes. Early in fiscal 2005 the local government
in
Beijing provided specified subsidies to offset interest expenses to encourage
Beijing HollySys’ research and development efforts. The subsidies from value
added tax collections will cease at the end of 2010. HollySys may not continue
to receive other subsidies from the local government in the future. If
governmental subsidies were reduced or eliminated, HollySys’ after-tax income
would be adversely affected.
Risks
Related to the Ownership of our Stock
The
market price of our shares is subject to price and volume fluctuations.
The
markets for equity securities have been volatile. The price of our common shares
may be subject to wide fluctuations in response to variations in operating
results, news announcements, trading volume, general market trends both
domestically and internationally, currency movements and interest rate
fluctuations or sales of common shares by our officers, directors and our
principal shareholders, customers, suppliers or other publicly traded companies.
Certain events, such as the issuance of common shares upon the exercise of
our
outstanding stock options, could also materially and adversely affect the
prevailing market price of our common shares. Further, the stock markets in
general have recently experienced price and volume fluctuations that have
affected the market prices of equity securities of many companies and that
have
been unrelated or disproportionate to the operating performance of such
companies. These fluctuations may materially and adversely affect the market
price of our common shares and the ability to resell shares at or above the
price paid, or at any price.
Following
the share purchase, a limited number of stockholders will collectively own
over
77% of our common stock and may act, or prevent certain types of corporate
actions, to the detriment of other stockholders.
Immediately
after the consummation of the share purchase transaction, the former holders
of
HollySys Holdings will own more than 77% of our outstanding common stock.
Accordingly, these stockholders (some of whom serve as, or are affiliated with,
our directors and officers) may, if they act together, exercise significant
influence over all matters requiring stockholder approval, including the
election of a majority of the directors and the determination of significant
corporate actions. This concentration could increase if the earnout shares
are
issued. This concentration could also have the effect of delaying or preventing
a change in control that could otherwise be beneficial to our
stockholders.
In
the redomestication transaction, we will become a British Virgin Islands company
and, because the rights of shareholders under British Virgin Islands law differ
from those under U.S. law, you may have fewer protections as a
shareholder.
Following
the Redomestication Merger, our corporate affairs will be governed by our
Memorandum and Articles of Association, the Business Companies Act of the
British Virgin Islands and the common law of the British Virgin Islands. The
rights of shareholders to take action against the directors, actions by minority
shareholders and the fiduciary responsibility of the directors under British
Virgin Islands law are to a large extent governed by the common law of the
British Virgin Islands. The common law of the British Virgin Islands is derived
in part from comparatively limited judicial precedent in the British Virgin
Islands as well as from English common law, which has persuasive, but not
binding, authority on a court in the British Virgin Islands. The rights of
our
shareholders and the fiduciary responsibilities of our directors under British
Virgin Islands law are not as clearly established as they would be under
statutes or judicial precedent in some jurisdictions in the United States.
In
particular, the British Virgin Islands has a less developed body of securities
laws as compared to the United States, and some states (such as Delaware) have
more fully developed and judicially interpreted bodies of corporate
law.
British
Virgin Islands companies may not be able to initiate shareholder derivative
actions, thereby depriving shareholders of the ability to protect their
interests.
British
Virgin Islands companies may not have standing to initiate a shareholder
derivative action in a federal court of the United States. The circumstances
in
which any such action may be brought, and the procedures and defenses that
may
be available in respect to any such action, may result in the rights of
shareholders of a British Virgin Islands company being more limited than those
of shareholders of a company organized in the United States. Accordingly,
shareholders may have fewer alternatives available to them if they believe
that
corporate wrongdoing has occurred. The British Virgin Islands courts are also
unlikely to recognize or enforce against us judgments of courts in the United
States based on certain liability provisions of U.S. securities law; and to
impose liabilities against us, in original actions brought in the British Virgin
Islands, based on certain liability provisions of U.S. securities laws that
are penal in nature. There is no statutory recognition in the British Virgin
Islands of judgments obtained in the United States, although the courts of
the
British Virgin Islands will generally recognize and enforce the non-penal
judgment of a foreign court of competent jurisdiction without retrial on the
merits. This means that even if shareholders were to sue us successfully, they
may not be able to recover anything to make up for the losses
suffered.
There
may not be an active, liquid trading market for our common stock, and the
trading price for our common stock may fluctuate
significantly.
Our
common stock is currently traded on the Over the Counter Bulletin Board, and
we
intend to file an application for listing on The Nasdaq National Market. Our
listing application may not be accepted. If we do not succeed in securing a
listing on the NASDAQ National Market, it could limit the ability to trade
our
common stock and result in a reduction of the price that can be obtained for
shares being sold.
Compliance
with all of the applicable provisions of the Sarbanes-Oxley Act will likely
be a
further condition of continued listing or trading. There is no assurance that
if
we are granted a listing on the Nasdaq National Market we will always be able
to
meet the Nasdaq National Market listing requirements, or that there will be
an
active, liquid trading market for our common stock in the future. Failure to
meet the Nasdaq National Market listing requirements could result in the
delisting of our common stock from the Nasdaq National Market, which may
adversely affect the liquidity of our shares, the price that can be obtained
for
them, or both.
We
may not pay cash dividends.
We
have
never paid any cash dividends on our common stock, and we may not pay cash
dividends in the future. Instead, we expect to apply earnings toward the further
expansion and development of our business. Thus, the liquidity of your
investment is dependent upon your ability to sell stock at an acceptable price,
rather than receiving an income stream from it. The price of our stock can
go
down as well as up, and fluctuations in market price may limit your ability
to
realize any value from your investment, including recovering the initial
purchase price.
Special
Note Regarding Forward-Looking Statements
This
Memorandum contains certain forward-looking statements. When used in this
Memorandum or in any other presentation, statements which are not historical
in
nature, including the words “anticipate,” “estimate,” “should,” “expect,”
“believe,” “intend” “may,” “project,” “plan” or “continue,” and similar
expressions are intended to identify forward-looking statements. They also
include statements containing a projection of revenues, earnings or losses,
capital expenditures, dividends, capital structure or other financial terms.
The
forward-looking statements in this Memorandum are based upon our management’s
beliefs, assumptions and expectations of our future operations and economic
performance, taking into account the information currently available to them.
These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties, some of which are not currently
known to us, which may cause our actual results, performance or financial
condition to be materially different from the expectations of future results,
performance or financial condition we express or imply in any forward-looking
statements. These forward-looking statements are based on our current plans
and
expectations and are subject to a number of uncertainties and risks that could
significantly affect current plans and expectations and our future financial
condition and results.
We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this Memorandum might not occur. We qualify any and all
of
our forward-looking statements entirely by these cautionary factors. As a
consequence, current plans, anticipated actions and future financial conditions
and results may differ from those expressed in any forward-looking statements
made by or on our behalf. You are cautioned not to unduly rely on such
forward-looking statements when evaluating the information presented
herein.
FORWARD-LOOKING
STATEMENTS
We
believe that some of the information in this proxy statement/prospectus
constitutes forward-looking statements within the definition of the Private
Securities Litigation Reform Act of 1995. However, the safe-harbor provisions
of
that act do not apply to statements made in this proxy statement/prospectus.
You
can identify these statements by forward-looking words such as “may,” “expect,”
“anticipate,” “contemplate,” “believe,” “estimate,” “intends,” and “continue” or
similar words. You should read statements that contain these words carefully
because they:
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discuss
future expectations;
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contain
projections of future results of operations or financial condition;
or
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state
other “forward-looking”
information.
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We
believe it is important to communicate our expectations to the Chardan
stockholders. However, there may be events in the future that we are not able
to
predict accurately or over which we have no control. The risk factors and
cautionary language discussed in this proxy statement/prospectus provide
examples of risks, uncertainties and events that may cause actual results to
differ materially from the expectations described by Chardan or the HollySys
Parties in its forward-looking statements, including among other
things:
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the
number and percentage of Chardan stockholders voting against the
stock
purchase proposal;
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changing
interpretations of generally accepted accounting
principles;
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outcomes
of government reviews, inquiries, investigations and related
litigation;
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continued
compliance with government
regulations;
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legislation
or regulatory environments, requirements or changes adversely affecting
the businesses in which HollySys Holdings and the HollySys Operating
Companies are engaged;
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fluctuations
in customer demand;
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management
of rapid growth;
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intensity
of competition from other providers of crop
seeds;
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timing
of approval and market acceptance of new
products;
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general
economic conditions; and
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geopolitical
events and regulatory changes.
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You
are
cautioned not to place undue reliance on these forward-looking statements,
which
speak only as of the date of this proxy statement/prospectus. All
forward-looking statements included herein attributable to any of Chardan,
the
HollySys Parties or any person acting on either party’s behalf are expressly
qualified in their entirety by the cautionary statements contained or referred
to in this section. Except to the extent required by applicable laws and
regulations, Chardan and the HollySys Parties undertake no obligations to update
these forward-looking statements to reflect events or circumstances after the
date of this proxy statement/prospectus or to reflect the occurrence of
unanticipated events.
Before
you grant your proxy or instruct how your vote should be cast or vote on the
adoption of the stock purchase agreement you should be aware that the occurrence
of the events described in the “Risk Factors” section and elsewhere in this
proxy statement/prospectus could have a material adverse effect on Chardan,
HollySys Holdings, the HollySys Operating Companies or the combined
company.
THE
CHARDAN SPECIAL MEETING
Chardan
Special Meeting
We
are
furnishing this proxy statement/prospectus to you as part of the solicitation
of
proxies by the Chardan board of directors for use at the special meeting in
connection with the proposed stock purchase, Redomestication Merger and stock
option plan. This document provides you with the information you need to know
to
be able to vote or instruct your vote to be cast at the special
meeting.
Date,
Time and Place
We
will
hold the special meeting at 10:00 a.m., Pacific Time, on ____________, 2006
at
625 Broadway, Suite 1111, San Diego, California 92101, to vote on the proposals
to approve the stock purchase agreement, the Redomestication Merger and stock
option plan.
Purpose
of the Special Meeting
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At
the special meeting, we are asking holders of Chardan common stock
to:
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approve
the stock purchase proposal;
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approve
the Redomestication Merger proposal;
and
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approve
the stock option proposal.
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The
Chardan board of directors:
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has
unanimously determined that the stock purchase proposal, the
Redomestication Merger proposal and the stock option proposal are
fair to
and in the best interests of Chardan and its
stockholders;
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has
unanimously approved the stock purchase proposal, the Redomestication
Merger proposal and the stock option
proposal;
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unanimously
recommends that Chardan common stockholders vote “FOR” the proposal to
adopt the stock purchase agreement,
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unanimously
recommends that Chardan common stockholders vote “FOR” the proposal to
redomesticate in the British Virgin Islands;
and
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unanimously
recommends that Chardan common stockholders vote “FOR” the proposal to
adopt the stock option plan.
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Record
Date; Who is Entitled to Vote
The
“record date” for the special meeting is ____________, 2006. Record holders of
Chardan common stock at the close of business on the record date are entitled
to
vote or have their votes cast at the special meeting. On the record date, there
were 7,000,000 outstanding shares of Chardan common stock.
Each
share of Chardan common stock is entitled to one vote per share at the special
meeting.
Pursuant
to agreements with Chardan, any shares of Chardan common stock held by
stockholders who purchased their shares of common stock prior to the initial
public offering (except for shares those holders may have purchased in the
public market) will be voted in accordance with the majority of the votes cast
at the special meeting on the stock purchase and Redomestication Merger
proposals.
Chardan’s
outstanding warrants do not have any voting rights, and record holders of
Chardan warrants will not be entitled to vote at the special
meeting.
Voting
Your Shares
Each
share of Chardan common stock that you own in your name entitles you to one
vote. Your proxy card shows the number of shares of Chardan common stock that
you own.
There
are
three ways to vote your shares of Chardan common stock at the special
meeting:
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You
can vote by signing and returning the enclosed proxy card
.
If you vote by proxy card, your “proxy,” whose name is listed on the proxy
card, will vote your shares as you instruct on the proxy card. If
you sign
and return the proxy card but do not give instructions on how to
vote your
shares, your shares will be voted as recommended by the Chardan board
“
FOR
”
the adoption of the stock purchase proposal, the Redomestication
Merger
proposal, and the stock option plan
proposal.
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You
can vote by telephone or on the internet by following the telephone
or
Internet voting instructions that are included with your proxy card.
If
you vote by telephone or by the Internet, you should not return the
proxy
card.
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You
can attend the special meeting and vote in person.
We
will give you a ballot when you arrive. However, if your shares are
held
in the name of your broker, bank or another nominee, you must get
a proxy
from the broker, bank or other nominee. That is the only way we can
be
sure that the broker, bank or nominee has not already voted your
shares.
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IF
YOU DO NOT VOTE YOUR SHARES OF CHARDAN COMMON STOCK IN ANY OF THE WAYS DESCRIBED
ABOVE, IT WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE ADOPTION OF THE STOCK
PURCHASE PROPOSAL AND THE REDOMESTICATION MERGER PROPOSAL, BUT WILL NOT HAVE
THE
EFFECT OF A DEMAND OF CONVERSION OF YOUR SHARES INTO A PRO RATA SHARE OF THE
TRUST ACCOUNT IN WHICH A SUBSTANTIAL PORTION OF THE PROCEEDS OF CHARDAN’S
INITIAL PUBLIC OFFERING ARE HELD OR A DEMAND FOR APPRAISAL RIGHTS UNDER DELAWARE
LAW.
Who
Can Answer Your Questions About Voting Your Shares
If
you
have any questions about how to vote or direct a vote in respect of your Chardan
common stock, you may call Dr. Richard D. Propper, Chardan’s chairman, (619)
795-4627.
No
Additional Matters May Be Presented at the Special Meeting
This
special meeting has been called only to consider the adoption of the stock
purchase proposal, the Redomestication Merger proposal and the stock option
proposal. Under Chardan’s by-laws, other than procedural matters incident to the
conduct of the meeting, no other matters may be considered at the special
meeting, if they are not included in the notice of the meeting.
Revoking
Your Proxy
If
you
give a proxy, you may revoke it at any time before it is exercised by doing
any
one of the following:
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You
may send another proxy card with a later
date;
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You
may notify Dr. Propper, Chardan’s chairman, in writing before the special
meeting that you have revoked your proxy;
and
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You
may attend the special meeting, revoke your proxy, and vote in person,
as
indicated above.
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Vote
Required
The
presence, in person or by proxy, of a majority of all the outstanding shares
of
common stock constitutes a quorum at the special meeting. Proxies that are
marked “abstain” and proxies relating to “street name” shares that are returned
to Chardan but marked by brokers as “not voted” will be treated as shares
present for purposes of determining the presence of a quorum on all matters.
The
latter will not be treated as shares entitled to vote on the matter as to which
authority to vote is withheld by the broker (“broker non-votes”). If you do not
give the broker voting instructions, under the rules of the NASD, your broker
may not vote your shares on the proposals to approve the stock purchase, the
Redomestication Merger or the stock option plan.
The
approval of the stock purchase and Redomestication Merger proposals will require
the affirmative vote of the holders of a majority of the Chardan common stock
outstanding on the record date. Because each of these proposals require the
affirmative vote of a majority of the shares of common stock outstanding and
entitled to vote, abstentions and shares not entitled to vote because of a
broker non-vote will have the same effect as a vote against the
proposal.
For
consummation of the stock purchase agreement, the Redomestication Merger
proposal must be approved by the stockholders. For the Redomestication Merger
to
be implemented, the stock purchase proposal must be approved by the
stockholders.
The
approval of the stock option plan will require the affirmative vote of a
majority of the Chardan common stock present and entitled to vote at the
meeting. Abstentions are deemed entitled to vote on the proposal, therefore,
they have the same effect as a vote against the proposal. However, broker
non-votes are not deemed entitled to vote on the proposal, so, they will have
no
effect on the vote on the proposal.
Conversion
Rights
Any
stockholder of Chardan holding shares of common stock issued in Chardan’s
initial public offering who votes against the stock purchase proposal may,
at
the same time, demand that Chardan convert his or her shares into a pro rata
portion of the trust account as of the record date. If the stockholder makes
that demand and the stock purchase is consummated, Chardan will convert these
shares into a pro rata portion of funds held in the trust account plus interest,
as of the record date.
The
closing price of Chardan’s common stock on ____________, 2006 (the record date)
was $_____ and the per-share, pro-rata cash held in the trust account on that
date was approximately $_____. Prior to exercising conversion rights, Chardan
stockholders should verify the market price of Chardan’s common stock as they
may receive higher proceeds from the sale of their common stock in the public
market than from exercising their conversion rights, if the market price per
share is higher than the conversion price.
If
the
holders of 1,150,000 or more shares of common stock issued in Chardan’s initial
public offering (an amount equal to 20% or more of these shares), vote against
the stock purchase and demand conversion of their shares, Chardan will not
be
able to consummate the stock purchase.
If
you
exercise your conversion rights, then you will be exchanging your shares of
Chardan common stock for cash and will no longer own these shares. You will
be
entitled to receive cash for these shares only if you continue to hold these
shares through the effective time of the stock purchase and then tender your
stock certificate to the combined company.
Appraisal
Rights
Under
Delaware corporate law, the Redomestication Merger of Chardan with HLS causes
the stockholders of Chardan to have appraisal rights in connection with the
transactions for which approval is sought. This right is separate from the
conversion rights of the holders of shares of Chardan common stock issued in
the
initial public offering. However, because the exercise of the appraisal right
and the conversion rights both require a tender of the holder’s shares to
Chardan, only one right may be elected in respect of the shares. See Annex
H for
more information about appraisal rights.
Solicitation
Costs
Chardan
is soliciting proxies on behalf of the Chardan board of directors. This
solicitation is being made by mail but also may be made by telephone or in
person. Chardan and its respective directors, officers and employees may also
solicit proxies in person, by telephone or by other electronic means. In
addition, the representatives and officers of the HollySys Parties are
soliciting proxies and may solicit proxies in person, by telephone or by other
electronic means. These persons will not be paid for these solicitation
activities.
Chardan
has not hired a firm to assist in the proxy solicitation process, but may do
so
if it deems this assistance necessary. Chardan will pay all fees and expenses
related to the retention of any proxy solicitation firm.
Chardan
will ask banks, brokers and other institutions, nominees and fiduciaries to
forward its proxy materials to their principals and to obtain their authority
to
execute proxies and voting instructions. Chardan will reimburse them for their
reasonable expenses.
Stock
Ownership
At
the
close of business on the record date, Dr. Richard D. Propper, Kerry S. Propper,
Jiangnan Huang, and Li Zhang, beneficially owned and were entitled to vote
approximately 1,250,000 shares of Chardan common stock, or approximately 17.9%
of the then outstanding shares of Chardan common stock, which includes all
of
the shares held by the directors and executive officers of Chardan and their
affiliates. Those persons, who were stockholders of Chardan prior to its initial
public offering of securities, have agreed to vote their shares (except for
any
shares they may have acquired in the public market) on the stock purchase and
Redomestication Merger proposals in accordance with the majority of the votes
cast by the holders of shares issued in Chardan’s initial public
offering.
Fairness
Opinion
Chardan
did not obtain a fairness opinion in respect of the acquisition of HollySys
or
the Redomestication Merger.
CONSIDERATION
OF THE STOCK PURCHASE TRANSACTION
The
following discussion of the principal terms of the stock purchase agreement
dated February 2, 2006 among Chardan and the HollySys Stockholders is subject
to, and is qualified in its entirety by reference to, the stock purchase
agreement. A copy of the stock purchase agreement is attached as an annex to
this proxy statement/prospectus and is incorporated in this proxy
statement/prospectus by reference.
General
Description of the Stock Purchase
Pursuant
to the stock purchase agreement, Chardan has established a wholly owned
subsidiary, HLS Systems International Ltd., under the laws of the British Virgin
Islands, and Chardan will merge with and into HLS concurrently with the closing
of the stock purchase. HLS will be the surviving entity, and the separate
corporate existence of Chardan will cease at the effective time of the merger.
Simultaneously with the merger, HLS will purchase all of the issued and
outstanding stock of HollySys Holdings, which in turn will own, or will have
acquired the rights to control, 74.11% of the outstanding stock of Beijing
HollySys Co., Ltd. and 89.64% of the outstanding stock of Hangzhou HollySys
Automation Co., Ltd., including 29.64% owned by virtue of the fact that Beijing
HollySys owns 40% of Hangzhou HollySys. We refer to HLS Systems International
Ltd., after giving effect to completion of the stock purchase, as HLS or the
combined company. As a result of the stock purchase, the former owners of
HollySys Holdings will own approximately 77% of the outstanding shares of the
combined company’s common stock, assuming no conversions or exercise of
appraisal rights and before any issuance of shares pursuant to the earn out
provisions of the stock purchase agreement.
Background
of the Stock Purchase
The
terms
of the stock purchase agreement are the result of arm’s-length negotiations
between representatives of Chardan and the HollySys Stockholders. The following
is a brief discussion of the background of these negotiations, the stock
purchase and related transactions.
Chardan
was formed on March 10, 2005 to serve as a vehicle to accomplish a business
combination with an unidentified operating business in the PRC that has its
primary operating facilities located in any city or province north of the
Yangtze River. Chardan completed an initial public offering on August 10,
2005, in which it raised net proceeds of approximately $30 million. Of
these net proceeds, approximately $25.8 million were placed in a trust
account immediately following the initial public offering and, in accordance
with Chardan’s Certificate of Incorporation, will be released either upon the
consummation of a business combination or upon the liquidation of Chardan.
Chardan must liquidate unless it has consummated a business combination by
February 10, 2007. If a letter of intent, agreement in principle or a definitive
agreement to complete a business combination was executed but the transaction
was not consummated prior to February 10, 2005, then it is not required to
liquidate unless the business combination contemplated by such letter of intent,
agreement in principle or definitive agreement is not consummated by August
10,
2007.
In
mid-August 2005, promptly after completing CNCAC’s public offering, the officers
and directors of CNCAC traveled to China to begin the initial interviewing
and
screening process to locate a company with which to effect a business
combination. CNCAC initially sought to identify acquisition candidates
principally through the efforts of Huang Jiangnan and Li Zhang, officers and
directors of CNCAC. Both of these persons have extensive contacts through the
Chinese business and legal community in the PRC. In addition, CNCAC began
looking at companies introduced by both the Guantao Law Firm and Chum Investment
Corporation. They helped to arrange meetings with several candidates during
that
approximately ten-day trip. Among the candidates that were interviewed during
that trip was HollySys.
To
further assist CNCAC in locating and evaluating companies in the PRC, CNCAC
(through Huang Jiangnan, an officer and director of CNCAC) contacted Greatace
Consultants Limited (“Greatace”), a Chinese business acquisition consulting
firm, on August 28, 2005 to seek its services in locating potential targets.
The
principals of Greatace have been known to Mr. Huang for many years. On September
1, 2005, CNCAC engaged Greatace, to assist it in identifying potential
acquisition candidates, preparing background investigations, industry analysis
and due diligence reports, among other things. Under the terms of the agreement,
Greatace will be paid a total of $200,000, payable in 4 installments. The first
three installments of $22,233 each are payable as milestone payments for a
due
diligence report on the first company that CNCAC targets as an acquisition
candidate. The remaining $133,300 will be paid upon the successful consummation
of a business transaction with an operating entity in the PRC.
The
services that Greatace provided included assisting CNCAC in identifying
acquisition opportunities; assisting in preparing and executing required
confidentiality, market stand-off and similar agreements; compiling preliminary
information about merger candidates; performing financial due diligence and
analysis; recommending acquisition structures; assessing the information about
the potential target that is available and working with accountants and legal
staff to prepare for a business combination, including agreement negotiation.
Greatace
commenced identifying and screening acquisition candidates in early September
2005. Greatace used its knowledge of Chinese companies and its network of
contacts, screening potential companies based on CNCAC’s criteria.
Greatace
and CNCAC selected five companies as potential candidates for a business
combination, and CNCAC requested preliminary reports from Greatace evaluating
of
the potential targets. On October 7, 2005, Greatace and the CNCAC team held
a
meeting to review the data collected on various potential targets and meet
with
representatives of some of these companies. On the basis of the information
provided by Greatace in the review and meetings, in October 2005, CNCAC selected
HollySys as the candidate with which to pursue an agreement.
The
CNCAC
representatives first met with HollySys’ President, Dr. Wang Changli and
Chairman, Madame Qiao Li, on August 17, 2005 and again on August 22, 2005,
for
preliminary discussions about a potential business combination. For some time
thereafter, the parties remained in contact through occasional phone calls
and
email communications, both directly and through their respective
representatives.
The
first
formal meeting to discuss this transaction was held on October 10, 2005, in
Beijing, China. CNCAC management, HollySys management and an advisory firm
for
HollySys, Chum Investment Corporation, exchanged information about CNCAC and
HollySys and suggested a general structure and terms of an acquisition by CNCAC.
In addition, preliminary issues of due diligence, exchange of information and
pricing were also discussed.
During
its discussions with HollySys, CNCAC and Greatace continued to evaluate other
potential candidates for a business combination.
On
November 18, 2005, Dr. Propper, Mr. Huang and Mr. Zhang from CNCAC and the
HollySys Stockholders, including representatives of Chum Investment Corporation,
met in Beijing for further discussions about the respective businesses and
terms
of the transaction. The parties were in general agreement about the acquisition
terms, but at this meeting they began to discus various specifics and raised
topics related to the acquisition and disclosure process.
After
two
days of negotiations and due diligence review in Beijing from November 18 to
November 19, 2005 (by and among Dr. Propper, Mr. Zhang Li and Mr. Jiangnan
Huang
of CNCAC and Dr. Wang Changli and Madame Qiao Li of HollySys), CNCAC signed
a
non-binding memorandum of understanding on November 27, 2005 with respect to
acquiring a controlling interest in HollySys. This memorandum set forth the
following:
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the
reorganization of HollySys which was to take into account the best
tax
arrangements for all parties;
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the
consideration to be paid for HollySys, which is reflected in the
stock
purchase agreement;
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the
terms of the additional consideration to be paid over time based
on
performance criteria;
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the
desire for a stock option plan; and
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the
inclusion of certain HollySys Stockholders on the board of directors
of
the surviving corporation.
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Promptly
after the execution of the memorandum of understanding, CNCAC’s United States
counsel prepared a draft of the stock purchase agreement and sent it to counsel
for HollySys. In addition, the Chinese counsel of CNCAC consulted with Chinese
counsel for HollySys and commenced discussion of the structure of the
transaction and the anticipated steps to be completed before agreement could
be
reached.
During
the period between November 28, 2005 and December 10, 2005, counsel exchanged
emails about various points in the agreements and continued to modify them
and
exchanged drafts of documents. Counsel and the accountants for all the parties
conducted legal and financial due diligence and negotiated points in the
agreements. During this period, representatives of CNCAC and HollySys also
conducted further due diligence.
On
December 10, 2005, there was a meeting at the offices of CNCAC’s United
States counsel, DLA Piper Rudnick Gray Cary, in San Diego, to negotiate the
final terms of stock purchase agreement. Dr. Propper and Mr. Zhang of CNCAC
and
CNCAC’s United States counsel attended the meetings in person. Dr. Wang Changli
and Madame Qiao Li of HollySys, Mr. Song Xuesong, executive director of Chum
Investment Corporation, advisor to HollySys, and Mr. Cui and Mr. Sun, partners
of Guantao Law Firm, counsel to HollySys, attended the meeting in person as
well. Substantial progress was made on the agreements at that time. Following
the meetings in San Diego, legal counsel for the respective parties continued
to
exchange comments and drafts of the contract documents for the transaction.
On
December 19, 2005, representatives of Greatace met with the board of
directors of CNCAC to give a report of their due diligence of HollySys and
analysis of the business in which HollySys operates. At the meeting were all
the
board members of CNCAC and Mr. Gu Robert, representing Greatace, who made the
report. The board of directors unanimously resolved to proceed with the
acquisition process and continue to work towards execution of a definitive
stock
purchase agreement.
On
January 31, 2006 the board of directors of CNCAC met to review the
transaction documents and evaluate and approve the acquisition of HollySys.
The
board of directors reviewed the latest forms of stock purchase agreement, the
stock consignment agreements, and the employment agreements. The board of
directors also reviewed the disclosure schedules to the stock purchase
agreement. After further review of the due diligence materials, the foregoing
were unanimously approved, subject to final negotiation and modification, and
the board determined to recommend the approval of the stock purchase agreement,
Redomestication Merger and related transactions and the stock option plan to
the
stockholders.
While
Dr.
Wang and the other representatives of HollySys were in San Diego from December
10, 2005 to December 14, 2005, Dr. Propper and counsel for CNCAC reviewed with
them the obligations of being a reporting company, including compliance with
the
reporting requirements of the federal securities laws, accounting procedures
and
Sarbanes Oxley requirements, press release disclosure and timing, shareholder
communications, website disclosure, financial public relations, NASDAQ
compliance and transfer agent requirements. Dr. Wang asked if Chardan Capital
LLC could help the post-transaction company in advising and complying with
all
the various requirements until management and the service providers in the
PRC
were familiar with the rules and regulations and public company demands. On
December 10, 2005, at a meeting in the offices of CNCAC’s legal counsel, the
consulting arrangement between Chardan Capital LLC and HollySys was agreed
to.
Because it is to last only until the HollySys management was familiar with
the
requirements of being public, it will be terminable at HollySys’ discretion,
without penalty. The monthly fee was determined to be $30,000. This arrangement
has not been reduced to a written agreement.
The
stock
purchase agreement was signed on February 2, 2006. Chardan issued a press
release that date and filed a Current Report on Form 8-K on
February 3, 2006 announcing the execution of the agreement and discussing
the terms of the stock purchase.
Board
Consideration and Approval of Transaction
While
no
single factor determined the final agreed upon consideration in the stock
purchase, Chardan’s board of directors reviewed various industry and financial
data, including certain valuation analyses and metrics compiled by members
of
the board and by Greatace in order to determine that the consideration to be
paid to the HollySys Stockholders was reasonable and that the stock purchase
was
in the best interests of Chardan’s stockholders.
Greatace,
a Chinese consulting firm hired by Chardan to assist in identifying and
screening candidates for a business combination, conducted a due diligence
review of HollySys and the HollySys Operating Companies that included an
industry analysis, a description of HollySys’ existing business model and
business operations, and financial projections in order to enable the board
of
directors to ascertain the reasonableness of this range of consideration.
Throughout the negotiation process, Greatace continued to assemble and review
relevant due diligence materials and, on November 19, 2005, delivered a due
diligence package that included the information regarding HollySys and the
HollySys Operating Companies that Greatace had gathered and prepared. During
its
negotiations with the HollySys Stockholders, Chardan did not receive services
from any financial advisor other than Greatace.
Interest
of Chardan Directors and Officers in the Stock
Purchase
In
considering the recommendation of the board of directors of Chardan to vote
for
the proposals to approve the stock purchase agreement, the Redomestication
Merger and the stock option plan, you should be aware that certain members
of
the Chardan board have agreements or arrangements that provide them with
interests in the stock purchase that differ from, or are in addition to, those
of Chardan stockholders generally. In particular:
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if
the stock purchase is not approved and Chardan fails to consummate
an
alternative transaction within the time allotted pursuant to its
Certificate of Incorporation, Chardan would be required to liquidate.
In
such event, the shares of common stock held by Chardan’s directors and
officers would be worthless because Chardan’s directors and officers are
not entitled to receive any of the liquidation proceeds, and any
warrants
they hold will expire worthless.
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Chardan’s
executives and directors own a total 1,250,000 shares of Chardan
common stock that have a market value of $__________ based on Chardan’s
share price of $_____ as of March __, 2006. However, as Chardan’s
directors and executives are contractually prohibited from selling
their
shares prior to August 2, 2008 (during which time the value of the
shares may increase or decrease), it is impossible to determine what
the
financial impact of the stock purchase will be on Chardan’s directors and
executives;
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the
transactions contemplated by the stock purchase agreement provide
that
Kerry S. Propper will be a director of
HLS;
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after
completion of the stock purchase, Chardan Capital LLC, an affiliate
of Dr.
Propper, Mr. Zhang and Mr. Huang, will provide a variety of ongoing
services to HollySys. Such services will be provided on a month-to-month
basis terminable at will by HollySys without penalty, at a cost to
HollySys of $30,000 per month. There is no written agreement governing
the
services to be provided, which will be on a non-exclusive basis and
include advice and help in meeting US public reporting requirements
and
accounting standards, Sarbanes-Oxley compliance, corporate structuring
and
development, stockholder relations, corporate finance and operational
capitalization and such other similar services as suggested and agreed
to
by Chardan Capital, LLC.
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Chard
an’s
Reasons for the Stock Purchase and Recommendation of the Chardan
Board
The
Chardan board of directors concluded that the stock purchase agreement with
the
HollySys Parties is in the best interests of Chardan’s stockholders. The Chardan
board of directors did not obtain a fairness opinion.
Each
member of Chardan’s board of directors has extensive experience in performing
due diligence of acquisition targets and in valuing companies. Three of the
directors, Dr. Propper and Messrs. Li and Huang, are currently principals in
Chardan Capital LLC, a strategic financial and management consulting company
that focuses on identifying attractive Chinese companies and in structuring
transactions involving those companies. One director, Mr. Kerry Propper, is
the
Chief Executive Officer of Chardan Capital Markets, a registered NASD broker
dealer.
The
Chardan board of directors considered a wide variety of factors in connection
with its evaluation of the stock purchase. In light of the complexity of those
factors, the Chardan board of directors did not consider it practicable to,
nor
did it attempt to, quantify or otherwise assign relative weights to the specific
factors it considered in reaching its decision. In addition, individual members
of the Chardan board may have given different weight to different
factors.
In
considering the stock purchase, the Chardan board of directors gave considerable
weight to the factors discussed below.
HollySys’
and the HollySys Operating Companies’ record of growth and expansion and high
potential for future growth
Important
criteria to Chardan’s board of directors in identifying an acquisition target
were that the company have established business operations, that it was
generating current revenues, and that it had what Chardan believes to be a
potential to experience growth in the future. Chardan’s board of directors
believes that HollySys and the HollySys Operating Companies have in place the
infrastructure for good business operations, a large and growing customer base,
technological capabilities and brand name recognition. HollySys commenced
business operations in 1993, and it has experienced an average annual revenue
growth of greater than 47% from 2003 through 2005. The fiscal 2005 revenues
were
approximately $79.6 million, and they have estimated revenues for 2006 of
approximately $110 million.
Although
revenue projections are inherently uncertain, Chardan’s board of directors
believed, and continues to believe, the projections for HollySys’ business are
reliable, based in part on its expected revenues, its overall business
practices, the widespread acceptance of its latest generation of products and
its strategy of targeting sectors of the Chinese economy that the government
has
identified as top growth priorities, such as rail transportation and nuclear
power.
This
record of significant growth helped to convince Chardan’s board of directors
that a business combination with HollySys would be in the best interests of
Chardan’s stockholders.
Chardan’s
board of directors believes that HollySys and the HollySys Operating Companies
have the ability to continue growth because:
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HollySys
has established itself as a leader in the Chinese automation industry
in
the twelve years it has been in
operation;
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China’s
rapid industrial expansion, which creates demand for HollySys’ products,
is expected to continue for the foreseeable
future;
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HollySys
has a strong presence in DCS automation markets, which are also expanding
markets as China’s continuing economic growth and its shift toward a
consumer economy;
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HollySys’
emphasis on maintaining high levels of engineering staff and its
rapid
development of new products should enable it to continue to enhance
its
position relative to its international
competitors;
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HollySys
intends to enter the international market, which will significantly
increase the opportunity for sales of its products, taking advantage
of
the continued availability of China’s comparative cost
advantages.
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Based
on
its review of the HollySys Operating Companies historical financial statements
and their business model and relationships, Chardan’s board of directors
believes that HollySys Operating Companies’ products will continue to be
attractive to Chinese customers. HollySys bases its products on the latest
electronics and information system technology, which improves reliability and
lowers production costs, helping HollySys to maintain and even to improve its
margins.
HollySys
represents an opportunity to invest in a growing, dynamic
industry
Another
criterion important to Chardan’s board of directors in identifying an
acquisition target was that the company be in an emerging or expanding industry
with potential for growth. While the automation industry has been in existence
for a long time, there are several aspects of the position that HollySys enjoys
that give it the opportunity for significant growth. Among those factors is
the
shift to digital technologies, which the widespread adoption of computers has
enabled. This permits a broader application of control technologies to more
processes and more aspects of each process, which not only opens up new
segments, but also leads to opportunities for system upgrades and replacements.
The industrial automation segment of the Chinese economy, which is the principal
market for HollySys’ products, is expected to continue, and that will give
HollySys the opportunity to expand its customer base. Even globalization has
contributed to growth opportunities, as manufacturers face increasing pressure
to deliver consistent quality at low cost, efficiencies that they can achieve
only with the use of sophisticated control systems such as those that HollySys
designs and sells.
The
experience of
HollySys’
management
Another
criterion important to Chardan’s board of directors in identifying an
acquisition target was that the company have a seasoned management team with
specialized knowledge of the markets within which it operates and the ability
to
lead a company in a rapidly changing environment. Chardan’s board of directors
believes that HollySys’ management has demonstrated that ability, addressing
critical issues such as the development of its product platform, its emphasis
on
rapid product development and deployment and its savvy marketing strategy,
which
targets its products and services to China’s most rapidly growing segments. By
utilizing its growing revenues to expand its market share and develop additional
products, HollySys’ management seems to have demonstrated a commitment to a
strategy that has given it a significant presence in the automation and controls
industry in the PRC. The excellent English skills of HollySys’ chief executive,
Wang Changli, will also be an important factor in the company’s plans to expand
internationally.
HollySys’
ability to execute its business plan, even with the risk that a significant
number of Chardan’s public stockholders would vote against the stock purchase
and exercise their conversion rights
Chardan’s
board of directors considered the risk that the current public stockholders
of
Chardan would vote against the stock purchase and demand to redeem their shares
for cash upon consummation of the stock purchase, thereby depleting the amount
of cash available to the combined company following the stock purchase or cause
a condition of the stock purchase agreement not to be met. Chardan structured
the payment terms in the stock purchase agreement to reflect this possibility
by
deferring some of the cash portion of the consideration. Chardan’s board of
directors deemed this risk to be no worse with regard to HollySys than it would
be for other target companies and believes that HollySys will still be able
to
implement its business plan, even if the maximum number of shares that can
be
converted into a pro rata portion of the trust account and still have the
transaction proceed are so converted.
Due
Diligence Information Materials
In
performing the analysis described above, Chardan’s board of directors also
reviewed an information statement prepared by Chardan’s consultants, Greatace,
in connection with its search for a suitable target company.
The
Greatace material provided information on the history and growth of HollySys,
a
detailed review of its products and markets (both current and planned), and
information regarding the company’s competitive position in the Chinese market,
both with respect to international competitors and domestic Chinese
competitors.
The
Greatace due diligence report examined the automation industry in China and
provided a market analysis. The report described the growth of the Chinese
automation industry, particularly the Distributed Control Systems (“DCS”)
market. The report reviewed the market segments within the automation industry
that HollySys had identified as areas of focus, and noted that HollySys has
developed different product lines designed to meet the specific needs of each
of
these market segments. The report provided a market analysis and description
of
trends in these market segments and a description of HollySys’ background and
technology in these markets. A separate section examined the other major
companies in these markets and HollySys’ competition in the automation system
industry, particularly in the DCS market, the nuclear power market and the
railway transportation market.
The
Greatace due diligence report described HollySys’ core technologies and how it
planned to implement its corporate business strategy toward becoming the market
leader in the Chinese automation industry. A section of the report summarized
HollySys’ operations within its principal business units, including how they
generate revenue, the profitability, growth rate and the relevant economic
factors that affect their results.
The
report then examined HollySys’ business operations, including employee
compensation and benefits, customer geographic locations and industries, sales
and distribution channels, product research and development, pricing policy,
advertising and marketing, material procurement control and supply, quality
control and project management. The report provided additional information
regarding HollySys’ financial performance from 2003 to 2005 by analyzing the
financial statements for those years. The report also discussed projected
operating results for 2006 to 2010 provided by HollySys.
The
report noted that the HollySys Stockholders had warranted to Greatace that
the
HollySys Operating Companies are not involved in or threatened with any legal
proceedings. The report provided information on the intellectual property owned
by HollySys, including eight licenses and trade certificates, forty-four
patents, nine copyrights and twenty-one trademarks. The report also provided
information on the real property owned by the HollySys Operating
Companies.
Mr.
Kerry
Propper, a director and officer of Chardan, prepared for the board of directors
an analysis of the post-transaction value of the HollySys Operating Companies.
He analyzed comparable companies in the automation and controls markets, taking
into account their relative market presences and maturity. He prepared a list
of
comparative price/earnings ratios of these companies and compared them to the
price/earnings of the HollySys Operating Companies and their anticipated
price/earnings. The valuation for the future of the HollySys Operating Companies
was based on various assumptions, including projected sales, assumed margins,
and projected net income. Capital resources were taken into account, based
on
the capital of the company after the acquisition and for income and
reinvestment, and for the potential of exercise of outstanding warrants of
Chardan. Based on this analysis, Mr. Propper concluded that, comparatively
speaking, the enterprise value of the HollySys Operating Companies, immediately
after the acquisition, was favorable. On the basis of the analysis, he concluded
that the board of directors, from an economic point of view, should consider
the
acquisition of the HollySys Holdings.
Chardan’s
board of directors also considered the methods by which HollySys Holdings may
own or control Beijing HollySys. In structuring the transaction and in preparing
the documentation, Chardan consulted with its legal counsel, which has offices
in the PRC, for advice on the acquisition of stock that is subject to transfer
restrictions. The methodology of stock consignment agreements is widely used
in
these instances, and Chardan’s counsel had them reviewed in its Beijing office.
Although the agreements are initially control arrangements, they provide for
transfer of title in the future if and when the restrictions are no longer
applicable, without any further consideration. Moreover, the consignment
agreements prevent the title holder from transferring the shares to another
or
taking any action limiting the rights of the consignee. The consignment
agreement freezes the ownership in the hands of the record/title owner, but
gives the consignee, all the incidents of beneficial ownership, including
voting, dividend, director nomination, management selection and every other
right of ownership other than record ownership. Transfer of record ownership
is
subject to the directions of the consignee, in this case HollySys Holdings,
so
long as it is a permitted transfer and transferee is acceptable under PRC law.
The stock purchase agreement provides for opinions of PRC counsel on the
validity and enforceability of all the agreements by the HollySys Stockholders.
On the basis of its discussions with counsel, the Chardan board of directors
believed that the restrictions and use of stock consignment agreements were
an
acceptable business strategy for obtaining an acquisition opportunity in the
PRC.
Satisfaction
of 80% Test
It
is a
requirement that any business acquired by Chardan have a fair market value
equal
to at least 80% of its net assets at the time of acquisition, which assets
shall
include the amount in the trust account. Based on the financial analysis of
HollySys generally used to approve the transaction, the Chardan board of
directors determined that this requirement was met and exceeded.
To
determine the value of HollySys, the board compiled a list of ten comparable
engineering/systems automation companies whose stock is traded in the public
markets. These companies were broken into three tiers based on their market
capitalization to delineate their relative market presence and cycle maturity.
Tier one included companies with market capitalization of over fifty billion
dollars; tier two included companies with market capitalizations between ten
billion and fifty billion dollars; and tier three included companies with less
than ten billion of market capitalization. The board then examined the price
earnings ratio to these companies. The overall average price earnings ratio
for
the 10 companies was 20.16. The average price earnings ratio was 19.54 for
the
tier two companies. The board used the 19.54 price earnings ratio of the tier
two companies because it was the average and, therefore, the most
representative.
The
companies used for this analysis were as follows:
|
Name
|
Exchange
|
Price
(USD)
|
Market
Cap (MM)
|
Shares
Outstanding (MM)
|
Enterprise
Value (MM)
|
Price
Earnings Ratio (P/E)
|
|||||||||||||
|
GENERAL
ELECTRIC CO
|
NYSE
|
34.85
|
367,495.16
|
10,600.81
|
603,153.06
|
20.15
|
|||||||||||||
|
SIEMENS
AG
|
XETRA
|
73.05
|
65,091.58
|
891.09
|
68,134.61
|
17.54
|
|||||||||||||
|
Tier
1 Average
|
|
18.85
|
|||||||||||||||||
|
|
|||||||||||||||||||
|
HONEYWELL
INTERNATIONAL
|
NYSE
|
36.63
|
31,246.48
|
855.15
|
35,110.02
|
17.44
|
|||||||||||||
|
EMERSON
ELECTRIC CO
|
NYSE
|
62.63
|
26,097.82
|
413.09
|
28,947.99
|
18.58
|
|||||||||||||
|
ABB
LTD
|
VIRT-X
|
6.54
|
13,549.39
|
2,028.41
|
14,899.11
|
22.59
|
|||||||||||||
|
Tier
2 Average
|
|
19.54
|
|||||||||||||||||
|
|
|||||||||||||||||||
|
ROCKWELL
AUTOMATION INC
|
NYSE
|
48.71
|
8,960.89
|
181.60
|
9,128.94
|
19.18
|
|||||||||||||
|
EATON
CORP
|
NYSE
|
59.90
|
9,026.93
|
147.40
|
10,597.26
|
12.20
|
|||||||||||||
|
YOKOGAWA
ELECTRIC
|
TOKYO
|
13.54
|
3,439.94
|
243.23
|
3,973.58
|
33.59
|
|||||||||||||
|
INVENSYS
PLC
|
LONDON
|
0.19
|
1,069.83
|
5,686.36
|
2,856.25
|
NA
|
|||||||||||||
|
ECHELON
CORP
|
NASDAQ
|
6.88
|
280.62
|
40.12
|
120.97
|
NA
|
|||||||||||||
|
Tier
3 Average
|
21.66
|
||||||||||||||||||
|
Total
Average
|
20.16
|
||||||||||||||||||
The
board
made several assumptions in deriving statistics about HollySys, solely for
the
purpose of management determining a value of HollySys. Investors should not
place any weight on these projections because any projection is subject to
many
assumptions some or all of which may not be correct or occur as assumed. The
assumptions were for the projection of revenues and net income for 2006. The
net
income assumption for fiscal year 2006 was $17,356,000. The projected net income
for 2006 was determined reasonable in light of the net income for 2003 of
approximately $2,227,000, for 2004 of $4,735,000, and for 2005 of $13,703,000
and orders for sales. Deductions were taken for the costs of the acquisition,
increased business operations expense and additional general and administrative
expenses, notably those associated with being a public company. The 2006
projection was also derived using a 17% margin. It was also assumed that
HollySys’ long-term debt would not increase would therefore have static debt of
approximately $6,800,000. Existing cash was assigned a re-investment growth
rate
of the current LT Treasury Yield while debt service was assigned a rate of
twice
the current LT Treasury Yield when computing applicable interest income
(expense). The current LT Treasury Yield was set at 3.81%
The
board
used 30,500,00 as the number of shares outstanding immediately after the
transaction while the fully diluted calculations included the additional shares
issueable by the exercise of outstanding warrants.
The
enterprise value is derived by the following formula: Enterprise Value equals
Market Capitalization, plus Debt, plus Preferred Equity, minus Cash and Cash
Equivalents. Using this formula, the board of directors arrived at a projected
enterprise value for HollySys of $337,367,000 for 2006. This was derived using
a
market capitalization of $339,095,000, an amount determined by taking the fair
market comparable capitalization using an implied market capitalization equal
to
a comparable price earnings ratio of 19.54 multiplied by the assumed earnings
of
HollySys for 2006 of $17,356,000. There is anticipated to be no additional
debt
in 2006 beyond the current $6,800,000 and no preferred equity issued and
outstanding in HollySys. Cash and cash equivalents of HollySys for 2006 were
assumed to be $8,524,000, which funds will be derived from their
operations.
The
Chardan board of directors believes because of the financial skills and
background of several of its members, it was qualified to make this analysis
itself and conclude that the acquisition of the HollySys Operating Companies
met
this requirement without recourse to an independent source.
Conclusion
of the Board of Directors
After
careful consideration, Chardan’s board of directors determined unanimously that
each of the stock purchase proposal, the Redomestication Merger proposal and
the
stock option proposal is fair to and in the best interests of Chardan and its
stockholders. Chardan’s board of directors has approved and declared advisable
the stock purchase proposal, the Redomestication Merger proposal and the stock
option proposal and unanimously recommends that you vote or give instructions
to
vote “FOR” each of the proposals to adopt the stock purchase proposal, the
Redomestication Merger proposal, the stock option proposal and the election
of
directors.
The
foregoing discussion of the information and factors considered by the Chardan
board of directors is not meant to be exhaustive, but includes the material
information and factors considered by the Chardan board of
directors.
Material
U.S. Federal Income Tax Considerations of the Redomestication
Merger
The
following discussion summarizes the material United States federal income tax
consequences of the Redomestication Merger to the Chardan stockholders who
are
“United States persons,” as defined for United States federal income tax
purposes and who hold their Chardan common stock as a capital asset within
the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the
“Code”). For United States federal income tax purposes, a “United States person”
is:
|
·
|
a
citizen or resident of the United
States;
|
|
·
|
a
corporation, partnership, or other entity created or organized in
the
United States or under the laws of the United States or any state
within
the United States;
|
|
·
|
an
estate whose income is includible in gross income for U.S. federal
income
tax purposes, regardless of its source;
or
|
|
·
|
a
trust whose administration is subject to the primary supervision
of a U.S.
court and that has one or more U.S. persons who have the authority
to
control all substantial decisions of the
trust.
|
The
term
“non-United States person” means a person or holder other than a “United States
person.”
This
section does not discuss all of the United States federal income tax
considerations that may be relevant to a particular stockholder in light of
his
or her individual circumstances or to stockholders subject to special treatment
under the federal income tax laws, including, without limitation:
|
·
|
brokers
or dealers in securities or foreign
currencies;
|
|
·
|
stockholders
who are subject to the alternative minimum tax provisions of the
Code;
|
|
·
|
tax-exempt
organizations;
|
|
·
|
stockholders
who are “non-United States
persons”;
|
|
·
|
expatriates;
|
|
·
|
stockholders
that have a functional currency other than the United States
dollar;
|
|
·
|
banks,
mutual funds, financial institutions or insurance
companies;
|
|
·
|
stockholders
who acquired Chardan common stock in connection with stock option
or stock
purchase plans or in other compensatory transactions;
or
|
|
·
|
stockholders
who hold Chardan common stock as part of an integrated investment,
including a straddle, hedge, or other risk reduction strategy, or
as part
of a conversion transaction or constructive
sale.
|
No
ruling
has been or will be sought from the Internal Revenue Service as to the United
States federal income tax consequences of the Redomestication Merger, and the
following summary is not binding on the Internal Revenue Service or the courts.
This discussion is based upon the Code, regulations, judicial authority, rulings
and decisions in effect as of the date of this Registration Statement, all
of
which are subject to change, possibly with retroactive effect. This summary
does
not address the tax consequences of the Redomestication Merger under state,
local and foreign laws or under United States federal tax law other than income
tax law.
Subject
to the limitations and qualifications referred to herein and assuming that
the
Redomestication Merger will be completed as described in the merger agreement
and this Registration Statement, the Redomestication Merger will constitute
a
“reorganization” within the meaning of Section 368(a) of the Code, and the
following United States federal income tax consequences will
result:
|
·
|
Chardan
stockholders will not recognize any gain or loss upon the receipt
of HLS
common stock in exchange for Chardan common stock in connection with
the
Redomestication Merger;
|
|
·
|
the
aggregate tax basis of the HLS common stock received by a Chardan
stockholder in connection with the Redomestication Merger will be
the same
as the aggregate tax basis of the Chardan common stock surrendered
in
exchange for HLS common stock;
|
|
·
|
the
holding period of the HLS common stock received by a Chardan stockholder
in connection with the Redomestication Merger will include the holding
period of the Chardan common stock surrendered in connection with
the
Redomestication Merger; and
|
|
·
|
Chardan
will recognize gain, but not loss, as a result of the Redomestication
Merger equal to the difference, if any, between the adjusted tax
basis in
Chardan’s assets and such asset’s fair market value at the effective time
of the Redomestication Merger.
|
The
foregoing United States federal income tax consequences is not affected by
the
changes made to the Code by the American Jobs Creation Act of 2004 in the
treatment of domestic business entities which expatriate from the United States
to a foreign jurisdiction. These new provisions, under Section 7874 of the
Code,
generally apply to the direct or indirect acquisition of substantially all
of
the properties of a domestic enterprise by a foreign corporation if there is
at
least 60% or 80% of continuing share ownership in the successor foreign entity
by the former U.S. corporation’s stockholders and substantial business
activities are not conducted in the jurisdiction in which such successor is
created or organized. Under the Chardan Redomestication Merger and the Stock
Purchase Agreement, following the Redomestication Merger into HLS, more than
60%
of stock of HLS (by vote and by value) will be held by persons who were not
holders of Chardan common stock, and accordingly Section 7874 should not apply
to HLS.
BECAUSE
OF THE COMPLEXITY OF THE TAX LAWS, AND BECAUSE THE TAX CONSEQUENCES TO ANY
PARTICULAR STOCKHOLDER MAY BE AFFECTED BY MATTERS NOT DISCUSSED ABOVE, EACH
STOCKHOLDER IS URGED TO CONSULT A TAX ADVISOR WITH RESPECT TO THE SPECIFIC
TAX
CONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED BY THE REDOMESTICATION MERGER
AND
THE STOCK PURCHASE TO HIM, HER OR IT, INCLUDING THE APPLICABILITY AND EFFECT
OF
STATE, LOCAL AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX
LAWS.
Anticipated
Accounting Treatment
The
stock
purchase transaction will result in the current shareholders of HollySys
Holdings obtaining a majority of the voting interests in Chardan Sub
(subsequently named HLS Systems International Limited). Generally accepted
accounting principles require that the company whose shareholders retain the
majority voting interest in a combined business be treated as the acquirer
for
accounting purposes. Since Chardan does not have any assets with operating
substance except cash and short-term investments, the transaction has been
accounted for as reorganization and recapitalization of HollySys Holdings.
The
cash of $30 million to be paid to the shareholders of HollySys Holdings will
be
accounted for as a capital distribution. The stock purchase transaction utilizes
the capital structure of Chardan and the assets and liabilities of HollySys
Holdings are recorded at historical cost. Although HollySys Holdings will be
deemed to be the acquiring company for accounting and financial reporting
purposes, the legal status of Chardan Sub (subsequently named HLS Systems
International Limited) as the surviving corporation will not
change.
Regulatory
Matters
The
stock
purchase and the transactions contemplated by the stock purchase agreement
are
not subject to the HSR or any federal or state regulatory requirement or
approval, except for filings necessary to effectuate the transactions
contemplated by the stock purchase proposal with the State of Delaware and
the
British Virgin Islands.
THE
STOCK PURCHASE
AGREEMENT
The
following summary of the material provisions of the stock purchase agreement
is
qualified by reference to the complete text of the stock purchase agreement,
a
copy of which is attached as an annex to this proxy statement/prospectus, and
is
incorporated by reference. All stockholders are encouraged to read the stock
purchase agreement in its entirety for a more complete description of the terms
and conditions of the stock purchase.
Structure
of the Stock Purchase and Redomestication Merger
At
the
effective time of the stock purchase agreement, Chardan will be merged with
and
into HLS Systems International Ltd. (“HLS”). HLS will continue as the surviving
company. All of the stock of Chardan will be converted into the right to receive
stock in HLS on a one-for-one basis. HLS will purchase all the common stock
of
HollySys Holdings, a British Virgin Island corporation, for $30,000,000 and
23,500,000 shares of common stock, and the additional consideration described
below. Through its acquisition of HollySys Holdings and the stock consignment
agreements, HLS will obtain the ownership or rights to control approximately
74.11% of the stock of Beijing HollySys and 89.64% of the stock of Hangzhou
HollySys (including beneficial ownership of 29.64% of the stock of Hangzhou
HollySys as a result of Beijing HollySys owning 40% of Hangzhou
HollySys).
Closing
and Effective Time of the Stock Purchase
The
closing of the stock purchase will take place promptly following the
satisfaction of the conditions described below under “Conditions to the
Completion of the Acquisition,” unless Chardan and the HollySys Stockholders
agree in writing to another time.
Name;
Headquarters; Stock Symbol
After
completion of the stock purchase:
|
·
|
the
name of the combined company will be HLS Systems International
Ltd.
|
|
·
|
the
corporate headquarters and principal executive officers will be located
at
19 Jiancaicheng Middle Road, Xisanqi, Haidan District, Beijing, China
100096, which is currently the HollySys corporate headquarters;
and
|
|
·
|
the
combined company will cause the common stock, warrants and units
outstanding prior to the stock purchase, which are traded on the
OTC
Bulletin Board, to continue trading on either the OTC Bulletin Board
or
the Nasdaq Stock Market. HLS intends to apply for listing using the
symbols HLSS for the common stock, HLSSW for the warrants and HLSSU
for
the units.
|
Purchase
Price
The
HollySys Stockholders and their designees will be paid an aggregate of
$30,000,000 in cash and will receive an aggregate of 23,500,000 shares of HLS
common stock for all the outstanding common stock of HollySys Holdings. A
portion of the cash purchase price ($3,000,000 plus two-thirds of the amount
by
which the funds in the trust account following exercise of any conversion rights
is less than $30,000,000) will be deferred until HLS receives at least
$60,000,000 in subsequent financing or HLS generates positive after-tax cash
flow equal to twice the deferred amount. The initial cash payment will be made
with funds in the trust account. The balance of the funds in the trust account
will be used for operational expenses.
As
additional consideration, certain HollySys Stockholders and their designees
will
be issued an aggregate of up to 8,000,000 shares of common stock of HLS for
each of the next four years (2,000,000 shares per year on a all-or-none
basis), if on a consolidated basis, HLS generates after-tax profits (excluding
after-tax operating profits from any subsequent acquisition for securities
that
have a dilutive effect and any expenses derived from the issuance of
aforementioned shares by HLS) of at least the following amounts:
|
Year
ending June 30,
|
After
Tax Profit
|
||
|
2007
|
$23,000,000
|
||
|
2008
|
$32,000,000
|
||
|
2009
|
$43,000,000
|
||
|
2010
|
$61,000,000
|
Representations
and Warranties
The
stock
purchase agreement contains a number of generally reciprocal representations
and
warranties that the HollySys Stockholders and Chardan made to each other. These
representations and warranties relate, as applicable, to:
|
·
|
organization,
standing, power;
|
|
·
|
capital
structure;
|
|
·
|
authorization,
execution, delivery, enforceability of the stock purchase
agreement;
|
|
·
|
absence
of conflicts or violations under organizational documents, certain
agreements and applicable laws or decrees, as a result of the contemplated
transaction, and receipt of all required consents and
approvals;
|
|
·
|
absence
of certain changes or events since September 30,
2005;
|
|
·
|
litigation;
|
|
·
|
compliance
with applicable laws;
|
|
·
|
absence
of brokers;
|
|
·
|
absence
of undisclosed liabilities;
|
|
·
|
accuracy
of information contained in the financial statements;
and
|
|
·
|
completeness
and truthfulness of the information and provisions in the stock purchase
agreement.
|
The
HollySys Stockholders also make representations to Chardan relating to the
HollySys Operating Companies regarding:
|
·
|
ownership
of the subsidiary stock;
|
|
·
|
labor
relations and employee plans;
|
|
·
|
environmental
liability;
|
|
·
|
taxes,
tax returns and audits;
|
|
·
|
licenses
and permits;
|
|
·
|
the
absence of illegal or improper
transactions;
|
|
·
|
the
collectibility of accounts
receivable;
|
|
·
|
the
nature and condition of inventory;
|
|
·
|
the
contracts to which they are
parties;
|
|
·
|
intellectual
property rights;
|
|
·
|
non-real
estate leases;
|
|
·
|
insurance;
|
|
·
|
the
accuracy and completeness of books and records;
|
|
·
|
related
party transactions; and
|
|
·
|
affiliates
of Beijing HollySys.
|
The
HollySys Stockholders also make representations to Chardan
regarding:
|
·
|
their
acquisition of HLS common stock being solely for their own
account;
|
|
·
|
their
status as accredited investors;
|
|
·
|
the
adequacy of the information they received regarding
Chardan;
|
|
·
|
the
restricted nature of the securities that they will receive under
the stock
purchase agreement; and
|
|
·
|
the
placement of legends on the certificates representing the securities
issued to them under the stock purchase
agreement.
|
Chardan
also makes representations to the HollySys Stockholders regarding:
|
·
|
filings
with the SEC and the accuracy and completeness of the information
contained in those filings, including the financial statements and
the
lack of undisclosed liabilities;
and
|
|
·
|
the
amount of funds contained in the trust
account.
|
Materiality
and Material Adverse Effect
Many
of
the representations and warranties made by the HollySys Stockholders are
qualified by materiality or the use of the term “material adverse effect.” For
the purposes of the stock purchase agreement, a “material adverse effect” means
a material adverse effect on the business, assets, operations, financial
condition, liquidity or prospects of HollySys or the HollySys Operating
Companies.
Several
of the representations and warranties made by Chardan are qualified by
materiality. However, only Chardan’s representation and warranty related to the
absence of certain changes and the absence of litigation is qualified by the
use
of the term “material adverse effect.”
Interim
Operations of Chardan and the HollySys Parties
Interim
Covenants relating to the HollySys Operating Companies and the HollySys
Stockholders
.
Under
the stock purchase agreement, each of the HollySys Stockholders has agreed
to
use their best efforts to cause the HollySys Operating Companies to conduct
business in the usual, regular and ordinary course, in substantially the same
manner as previously conducted. In addition to this agreement regarding the
conduct of business generally, subject to specified exceptions, the HollySys
Stockholders have agreed that, except as otherwise expressly permitted or
required by the stock purchase agreement, they will, and they will use their
best efforts to cause the HollySys Operating Companies to:
|
·
|
not
declare, set aside or pay any dividends on, or make any other
distributions in respect of, any of their capital
stock;
|
|
·
|
not
pledge, sell, transfer, dispose or otherwise encumber or grant any
rights
or interests to any others in the HollySys stock or the HollySys
Operating
Companies stock;
|
|
·
|
not
pledge, sell, transfer, lease dispose of or otherwise encumber any
property or assets of any HollySys Operating Company, other than
in
accordance with past practice or in the normal course of
business;
|
|
·
|
not
issue, deliver, sell or grant any shares of its capital stock, any
securities convertible into or exchangeable for, or any options,
warrants
or rights to acquire, any shares of capital
stock;
|
|
·
|
not
make or agree to a general wage or salary increase or enter into
any
employment contract, increase the compensation payable or to become
payable to any officer or employee of any HollySys Operating Company
or
adopt or increase the benefits of any bonus, insurance, pension or
other
employee benefit plan, payment or arrangement, except for those increases
consistent with past practices, normally occurring as the result
of
regularly scheduled salary reviews and increases, and except for
increases
directly or indirectly required as a result of changes in applicable
laws;
|
|
·
|
not
amend the organization documents of the HollySys Operating
Companies;
|
|
·
|
not
merge or consolidate with, or acquire all or substantially all the
assets
of, or otherwise acquire, any other business
operations;
|
|
·
|
not
make any payments outside the ordinary course of
business;
|
|
·
|
not
make any capital expenditures, except in accordance with prudent
business
and operational practices consistent with prior
practice;
|
|
·
|
provide
Chardan with access to information regarding the business of HollySys
and
the HollySys Operating Companies;
|
|
·
|
maintain
in effect insurance of the types and in the amounts customarily acquired
to protect the assets and business of the HollySys Operating
Companies;
|
|
·
|
protect
the confidential information of the HollySys Operating Companies
that they
have received in the course of the
negotiations;
|
|
·
|
refrain
from competing with HollySys or the HollySys Operating
Companies;
|
|
·
|
refrain
from any discussions or negotiations with any other party regarding
the
issuance of any capital stock or the sale or transfer of any portion
of
the business of any HollySys Operating
Company;
|
|
·
|
refrain
from engaging in any transaction involving the securities of
Chardan;
|
|
·
|
disclose
certain material information that arises or comes to be known between
the
date of the stock purchase agreement and the date of the
closing;
|
|
·
|
use
their best efforts to obtain all authorizations, consents, orders
and
approvals that may be or become necessary for their execution and
delivery
of, and the performance of their obligations pursuant to, the stock
purchase agreement;
|
|
·
|
not
acquire any rights to or use any of the intellectual property of
HollySys
or the HollySys Operating
Companies;
|
|
·
|
pay
any taxes that become due as a result of the issuance to them of
HLS
common stock;
|
|
·
|
do
all things necessary to effectuate the HollySys stock purchase transaction
contemplated under the stock purchase
agreement;
|
|
·
|
complete
the restructuring related to the formation and ownership of HollySys
Holdings and have HollySys Holdings obtain any required stockholder
approval for the stock purchase transaction contemplated under the
stock
purchase agreement;
|
|
·
|
provide
to Chardan such information as is necessary regarding HollySys Holdings
and the HollySys Operating Companies as is required under the rules
of the
SEC for the proxy statements; and
|
|
·
|
provide
to Chardan interim internal financial and management reports regarding
the
conduct of the business of the HollySys Operating
Companies.
|
Interim
Covenants relating to Chardan
.
The
stock purchase agreement, among other things, requires Chardan to:
|
·
|
conduct
its business in the ordinary course, not sell or issue any capital
securities of Chardan, encumber any of the assets of Chardan or incur
any
debt out of the ordinary course, not declare or pay any dividend,
or make
any general wage increase;
|
|
·
|
not
change its Certificate of Incorporation, by-laws, articles or other
organizational documents;
|
|
·
|
call
the stockholders meeting to which this proxy
relates;
|
|
·
|
incorporate
HLS;
|
|
·
|
cause
the board of HLS, after the closing, to initially consist of nine
persons,
of which three members will be designated by the HollySys Stockholders,
one member will be designated by the board of Chardan and five members
will satisfy the independence requirements of Nasdaq;
and
|
|
·
|
apply
to have the shares of HLS listed in the Nasdaq National Market following
the closing.
|
No
Solicitation by Chardan
Except
as
described below, generally Chardan will not:
|
·
|
solicit,
initiate or encourage the submission of any acquisition
proposal;
|
|
·
|
enter
into any agreement with respect to any acquisition proposal;
or
|
|
·
|
participate
in any discussions or negotiations regarding, or furnish to any person
any
information with respect to, or take any other action to facilitate
any
inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any acquisition
proposal.
|
However,
Delaware corporate law requires, if Chardan receives a bona fide written
acquisition proposal which was not solicited by Chardan, it may, before the
stock purchase agreement is adopted by its stockholders, furnish information
regarding itself to the person making the acquisition proposal and participate
in discussions, but not negotiations, with the person regarding the acquisition
proposal, if:
|
·
|
the
board of directors determines, in good faith that the acquisition
proposal
constitutes or is reasonably likely to lead to a superior proposal;
and
|
|
·
|
the
board of directors determines in good faith that failure to submit
such
superior proposal to its stockholders would cause the board of directors
to violate its fiduciary duties to the stockholders under applicable
law.
|
If
Chardan has received a superior proposal, Chardan has the right to terminate
the
stock purchase agreement, based upon a determination in good faith, relying
upon
the advice of outside legal counsel, that the failure to terminate is reasonably
likely to result in the board of directors breaching its fiduciary
duty.
No
Solicitation by the HollySys Parties
The
HollySys Stockholders have agreed that they will not, and will use their best
efforts to cause the HollySys Operating Companies to not:
|
·
|
solicit,
initiate or encourage discussions regarding or the submission of
any
acquisition proposal;
|
|
·
|
enter
into any agreement with respect to any acquisition proposal;
or
|
|
·
|
participate
in any discussions or negotiations regarding, or furnish to any person
any
information with respect to, or take any other action to facilitate
any
inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any acquisition
proposal.
|
The
HollySys Parties will cease immediately all discussions and negotiations
regarding any proposal that constitutes, or may reasonably be expected to lead
to, an acquisition proposal.
Chardan
Stockholders’ Meeting
Chardan
has agreed to call and hold a meeting of its stockholders, as soon as
practicable after the date of the stock purchase agreement for the purpose
of
seeking the approval of the stock purchase by its stockholders. Chardan has
also
agreed that it will file all required proxy materials with the SEC and, through
its board of directors, recommend to its stockholders that they approve and
adopt the stock purchase proposal.
Access
to Information; Confidentiality
Chardan
and the HollySys Parties will afford to the other party and its representatives
prior to completion of the stock purchase reasonable access during normal
business hours to all of their respective properties and records and will
promptly provide to the other party a copy of each document filed pursuant
to
the requirements of the securities laws the United States, and all other
information concerning its business, properties and personnel as the other
party
reasonably requests. The information will be held in confidence to the extent
required by the provisions of the confidentiality agreement between the two
parties.
Reasonable
Efforts; Notification
Chardan
and the HollySys Parties have agreed that they will use all reasonable efforts
to take all actions, and to do all things necessary, proper or advisable to
consummate the stock purchase and the transactions contemplated by the stock
purchase agreement in the most expeditious manner practicable. This
includes:
|
·
|
obtaining
all necessary actions or non-actions, waivers, consents and approvals
from
governmental entities and making all necessary registrations and
filings,
including filings with governmental entities, if any, and taking
all
reasonable steps as may be necessary to obtain an approval or waiver
from,
or to avoid an action or proceeding by, any governmental
entity;
|
|
·
|
obtaining
all necessary consents, approvals or waivers from third
parties;
|
|
·
|
defending
any lawsuits or other legal proceedings, whether judicial or
administrative, challenging the stock purchase agreement or any other
agreement contemplated by the stock purchase agreement or the consummation
of the stock purchase or other transactions contemplated by the stock
purchase agreement including seeking to have any stay or temporary
restraining order entered by any court or other governmental entity
vacated or reversed; and
|
|
·
|
executing
and delivering any additional instruments necessary to consummate
the
stock purchase or other transactions contemplated by the stock purchase
agreement and to fully carry out the purposes of the stock purchase
agreement and the transaction agreements contemplated by the stock
purchase agreement.
|
The
HollySys Parties will give prompt notice to Chardan, and Chardan will give
prompt notice to the HollySys Parties, of:
|
·
|
any
representation or warranty made by it contained in the stock purchase
agreement becoming inaccurate or misleading;
or
|
|
·
|
the
failure by it to comply with or satisfy in any material respect any
covenant, condition or agreement to be complied with or satisfied
by it
under the stock purchase agreement.
|
However,
no notification will affect the representations, warranties, covenants or
agreements of the parties or the conditions to the obligations of the parties
under the stock purchase agreement or the agreements contemplated thereby as
originally made. Accordingly, such notification may permit a termination of
the
stock purchase agreement.
Indemnification
The
HollySys Stockholders shall indemnify and hold harmless Chardan (or HLS after
the closing) for any damages, whether as a result of any third party claim
or
otherwise, which arise from or in connection with the breach of representations
and warranties and agreements and covenants of the HollySys Parties. Chardan
shall indemnify and hold harmless each HollySys Stockholder for any damages,
whether as a result of any third party claim or otherwise, which arise from
or
in connection with the breach of representations and warranties and agreements
and covenants of Chardan, which will be assumed by HLS upon the Redomestication
Merger. Claims may be asserted once the damages exceed $250,000. Any
indemnification payments shall be deemed to be an adjustment to the purchase
price.
The
determination to assert a claim for indemnification against the HollySys
Stockholders for the benefit of Chardan (or HLS after the closing) will be
determined by an independent committee of the board of directors of Chardan.
The
independent committee of the board of directors will consist of at least two
persons, as selected by the board of directors, none of whom is an officer
or
employee of Chardan (or HLS after the closing) and its subsidiaries or is the
direct or beneficial owner of 5% or more of the voting capital stock of Chardan
(or HLS after the closing).
Expenses
Except
as
provided in the stock purchase agreement, all fees and expenses incurred in
connection with the stock purchase and the other transactions contemplated
by
the stock purchase agreement will be paid by the party incurring such expenses,
whether or not the stock purchase is consummated. The HollySys Stockholders
have
agreed they have no right to claim or be paid any amount from the Chardan trust
account, except on consummation of the stock purchase agreement.
Public
Announcements
Chardan,
on the one hand, and the HollySys Stockholders, on the other hand, have
agreed:
|
·
|
to
consult with each other before issuing, and provide each other the
opportunity to review and comment upon, any press release or other
public
statements with respect to the stock purchase and the other transactions
contemplated by the stock purchase agreement;
and
|
|
·
|
not
to issue any press release or make any public statement prior to
this
consultation, except as may be required by applicable laws or court
process.
|
Conditions
to the Completion of the Acquisition
Consummation
of the stock purchase is conditioned on the stockholders of Chardan, at a
meeting called for these purposes, (i) approving the stock purchase agreement
and related transactions, and (ii) approving the merger of Chardan into HLS
for
the purpose of corporate reincorporation and redomestication in the British
Virgin Islands, which will include retention of the HLS name and an increase
in
the authorized capital of the current company. The stockholders will also be
asked to adopt a stock plan, but the stock purchase and redomestication
transactions are not dependent on the approval of this plan.
In
addition, the stock purchase agreement is conditioned upon (i) no order, stay,
judgment or decree issued by any governmental authority preventing, restraining
or prohibiting in whole or in part, the consummation of the transactions
contemplated in the stock purchase agreement, (ii) execution and delivery to
each party of each of the various transaction documents, (iii) delivery by
each
party to the other party of a certificate to the effect that the representations
and warranties of each party are true and correct in all material respects
as of
the closing and all covenants contained in the stock purchase agreement have
been materially complied with by each party, and (iv) receipt of necessary
consents and approvals by third parties and completing necessary
proceedings.
The
obligations of each HollySys Stockholder to consummate the transactions
contemplated by the stock purchase agreement also are conditioned upon each
of
the following, among other things:
|
·
|
HLS
will have delivered the HLS stock and made the payments specified
in the
stock purchase agreement, and the HollySys Stockholders will have
received
confirmations of the payment of the cash portion thereof and such
other
documents, certificates and instruments as may be reasonably requested
by
the HollySys Stockholders;
|
|
·
|
the
HollySys Stockholders must have received a legal opinion, dated as
of the
closing, from DLA Piper Rudnick Gray Cary US LLP, counsel to
Chardan;
|
|
·
|
HLS
will be an existing company under the laws of the British Virgin
Islands;
|
|
·
|
HollySys
Holdings shall have entered into, effective as of the closing, the
employment agreements with the key executives, Dr. Wang Changli and
Madame
Qiao Li, the forms of which are exhibits to the stock purchase agreement;
|
|
·
|
Chardan
must have performed all its obligations and all of Chardan’s
representations and warranties must be true and correct;
|
|
·
|
at
the closing, there will have been no material adverse change in the
assets, liabilities or financial condition of Chardan and HLS from
that
shown in the Chardan balance sheet and related statements of income,
and
between the date of the stock purchase agreement and the closing
date,
there will have not occurred an event which, in the reasonable opinion
of
HollySys, would have had a material adverse effect on the operations,
financial condition or prospects of Chardan and HLS;
|
|
·
|
effective
as of the closing, the directors of Chardan who are not continuing
as
directors and officers of Chardan (or HLS, as the case may be) will
have
resigned and agreed that they have no claim for employment compensation
in
any form from Chardan; and
|
|
·
|
disbursement
of funds held in the trust account maintained for
Chardan.
|
The
obligation of Chardan to consummate the transactions contemplated by the stock
purchase agreement also are conditioned upon each of the following, among other
things:
|
·
|
the
HollySys Stockholders will have delivered the HollySys Holdings
stock;
|
|
·
|
the
stock consignment agreements will have been executed and
delivered;
|
|
·
|
at
the closing, there will have been no material adverse change in the
assets, liabilities, financial condition or prospects of HollySys
Holdings, the HollySys Operating Companies or its business from that
shown
or reflected in the financial statements of September 30, 2005 and
as to
be described in the Chardan proxy statement, and between the date
of the
stock purchase agreement and the closing date, there shall not have
occurred an event which, in the reasonable opinion of Chardan would
have a
material adverse effect on HollySys Holdings or the HollySys Operating
Companies;
|
|
·
|
the
information about HollySys Holdings, the HollySys Operating Companies
and
their subsidiaries and management provided for inclusion in the Chardan
proxy statement at the time of its distribution and at the closing,
will
accurately reflect the business, HollySys Holdings, the HollySys
Operating
Companies and the HollySys Stockholders, and not contain any untrue
statement of a material fact or omission;
|
|
·
|
Chardan
must have received a legal opinion, dated as of the closing, from
Guantao
Law Firm, counsel to the HollySys
Parties;
|
|
·
|
HollySys
Holdings, the HollySys Operating Companies and each HollySys Stockholder
must have performed all their obligations and all of their representations
and warranties must be true and correct;
and
|
|
·
|
each
of Dr. Wang Changli and Madame Qiao Li will have entered into the
form of
employment agreement which is an exhibit to the stock purchase
agreement.
|
Termination
The
stock
purchase agreement may be terminated at any time, but not later than the closing
as follows:
|
·
|
by
mutual written consent of Chardan and the HollySys
Stockholders;
|
|
·
|
by
either party if the other party amends a schedule and such amendment
or
supplement reflects a material adverse change in the condition, operations
or prospects of its business;
|
|
·
|
by
either party if the closing has not occurred by June 30, 2006 (unless
such
terminating party is in breach of any of its material covenants,
representations or warranties);
|
|
·
|
by
either party if the other party has breached any of its covenants
or
representations and warranties in any material respect and has not
cured
its breach within 10 business days of the notice of an intent to
terminate, provided that the terminating party is itself not in
breach;
|
|
·
|
by
Chardan if its board of directors shall have determined in good faith,
based upon the advice of outside legal counsel, that failure to terminate
the stock purchase agreement is reasonably likely to result in the
board
of directors breaching its fiduciary duties to stockholders by reason
of a
pending, unsolicited, bona fide written proposal for a superior
transaction; or
|
|
·
|
by
either party if, at the Chardan stockholder meeting, the stock purchase
agreement and Redomestication Merger and the transactions contemplated
thereby shall fail to be approved and adopted by the affirmative
vote of
the holders of Chardan’s common stock, or 20% or more of the shares sold
in the initial public offering are presented for conversion into
the pro
rata portion of the trust account in accordance with the Chardan
certificate of incorporation.
|
Neither
HollySys, the HollySys Operating Companies nor the HollySys Stockholders have
any right to damages from Chardan or HLS, and they have no right to any amount
held in the trust account, and they have agreed not to make any claim against
Chardan and HLS that would adversely affect the business, operations or
prospects of Chardan and HLS or the amount of the funds held in the trust
account.
Effect
of Termination
In
the
event of proper termination by either Chardan or the HollySys Stockholders,
the
stock purchase agreement will become void and have no effect, without any
liability or obligation on the part of Chardan or the HollySys Stockholders,
except in connection with the confidentiality obligations set forth in the
stock
purchase agreement.
Amendment
The
stock
purchase agreement may be amended at any time before or after receipt of the
approval from Chardan’s stockholders. However, after receipt of the approval
from Chardan’s stockholders, the parties may not, without further stockholders’
approval, amend the stock purchase agreement, in a manner that by law requires
further approval by the stockholders of Chardan. In addition, no amendment
will
be binding on any of the parties unless such amendment made in writing by all
of
them.
Extension;
Waiver
At
any
time prior to the consummation of the stock purchase, Chardan and the HollySys
Stockholders may extend the time for the performance of any of the obligations
or other acts, waive any inaccuracies in the representations and warranties
or
waive compliance with any of the conditions. Any agreement on the part of either
Chardan or the HollySys Stockholders to any such extension or waiver will be
valid only if set forth in an instrument in writing signed on behalf of it.
The
failure of Chardan or the HollySys Stockholders to assert any of its rights
will
not constitute a waiver.
Employment
Agreements
Each
of
Dr. Wang Changli and Madame Qiao Li will enter into a three-year employment
agreement with HollySys Holdings. Dr. Wang will be employed as the chief
executive officer, and Madame Qiao will be the chairperson. Each of the
agreements provide for an annual salary and a discretionary cash bonus based
on
the overall performance of HollySys, as the compensation committee determines.
The executives will be entitled to insurance benefits, five weeks vacation,
a
car and reimbursement of business expenses and, if necessary, relocation
expenses. The agreements will be terminable by HollySys for death, disability
and cause. The executive may terminate for good reason, which includes HollySys’
breach, the executive’s not being a member of the board of directors, and change
of control. The agreements contain provisions for the protection of confidential
information and a three-year-after employment non-competition period within
China.
Stock
Consignment Agreement
The
stock
consignment agreements provide for the control of the shares of Beijing HollySys
and Hangzhou HollySys. The reason for the agreement is that the shares held
by
the directors, supervisors or the senior managers of a joint stock company
formed under PRC law may not be transferred in amounts in excess of 25% of
the
person’s holdings annually during the incumbency period. Dr. Wang Changli, who
held 14.23% of the outstanding shares of Beijing HollySys, is subject to this
restriction. Dr. Wang transferred his equity interests to HollySys Holdings
by
entering into a consignment agreement. Since the other HollySys Stockholders
(other than Team Spirit and OSCAF) have entered into voting-together agreements
with Dr. Wang, they also consigned their equity interests in Beijing HollySys
to
HollySys Holdings.
The
agreements give HollySys the control of the shares of Beijing HollySys subject
thereto. The agreements give HollySys Holdings the right to manage in all
respects the shares held in title by the stockholder, including all stockholder
rights to call meetings of stockholders, to submit stockholder proposals, to
elect directors, to vote the shares on all matters and to exercise all other
rights of a stockholder in respect of the shares consigned. More specifically,
the consignment agreements include giving the right to replace and increase
the
number of the directors, supervisors and recommend new director and supervisor
persons, and to exercise management rights, controlling rights and
decision-making power over the shares or the subject company.
All
of
the Beijing HollySys shares held by each HollySys Stockholder (other than Team
and OSCAF) are subject to the agreements. The agreements are subject to force
majeure limitations. There is no unilateral right of termination, except in
the
event of a breach, in which event the non-breaching party may cancel the
consignment agreement after notice and a reasonable cure period. Each consigning
stockholder has warranted its authority to enter into the agreement and that
it
has not entered into any other agreements that would conflict with the
consignment agreement.
The
import of the stock consignment agreements is that HollySys Holdings, and
subsequently HLS, may consolidate the HollySys Operating Companies whose shares
are subject to stock consignment agreements in the manner of wholly and majority
owned subsidiaries and enjoy the economic benefits of such subsidiaries. The
stock consignment agreements are subject to enforceability and limitations
of
the laws and rules of PRC. PRC counsel to the HollySys Parties have opined
that
these agreements are enforceable under current PRC law. The termination of
one
stockholder’s consignment agreement does not cause the termination of any of the
other consignment agreements, so it would only result in a reduction in
consigned shares under HollySys Holdings’ control.
The
following is a table of the parties to the consignment agreements:
|
Consigned
Stock
|
Consigning
Owner
|
% of Total Shares | ||
|
Beijing
HollySys
|
Ace
Lead Profits Limited (Wang Changli)
|
14.23%
|
||
|
Beijing
HollySys
|
Plus
View Investments Limited (Luo An)
|
9.88%
|
||
|
Beijing
HollySys
|
Acclaimed
Insight Investments Limited (Cheng Wusi)
|
24%
|
||
|
Beijing
HollySys
|
Pioneer
Sum Investments Limited (Mei Qinglin)
|
6%
|
||
|
Beijing
HollySys
|
Allied
Earn Investments Limited (Shanghai Jinqiaotong Industrial Development
Co.,
Ltd.)
|
20%
|
Protections
of Shareholders Against the Loss of Consigned and Assigned
Assets
The
structure of the consignment agreements is intended to protect the assets of
HollySys Holdings for the shareholders of HLS. This is a typical method of
protecting the investors in a company which cannot own all the stock of a
company in the PRC because of the laws against complete stock ownership.
There
are
additional corporate protections. The board of directors of HLS will be
comprised of a majority of independent persons, one of which initially will
be a
designee of Chardan. The board of directors will be maintained pursuant to
the
rules of Nasdaq which require a majority of persons on the board of directors
to
be independent directors and that transactions with insiders must be approved
by
an audit committee comprised of independent directors. The consignees will
not
be deemed independent persons under the rules of Nasdaq, and therefore they
will
not be eligible to be members of the audit committee. Moreover, HLS has a code
of ethics that requires fair dealing by officers and directors in transactions
with the company. Although one of the persons consigning the shares of Beijing
HollySys and Hangzhou HollySys will be an officer and director of HLS, the
above
corporate controls are several methods that prevent him from taking a decision
to terminate the consignment agreement unilaterally for his own benefit. Because
a termination of a consignment agreement would be a material event, it would
be
disclosed in an 8-K report.
A
termination of the consignment agreements would be a transfer of a substantial
asset of HLS. Pursuant to the law of the British Virgin Islands applicable
to
HLS, the sale or transfer of 50% or more of the assets of the company requires
approval of the shareholders. Such approval would require a meeting of the
shareholders to be called and held, with a proxy statement describing the action
to be approved and the consequences of the approval.
Pursuant
to the stock purchase agreement, each HollySys Stockholder who consigns his
shares to HollySys Holdings will use best efforts to complete the acquisition
of
the ownership of the consigned stock by HollySys Holdings from such HollySys
Stockholder as soon as such acquisition is permitted by applicable law and
regulations. Once consigned stock is transferred to HollySys Holdings, it will
no longer be subject to the consignment agreement and a termination of the
consignment agreement will not affect its ownership. PRC law provides for
enforcement of minority rights in respect of corporations which are intended
to
protect against improper dealings by the majority to the detriment of the
minority shareholders.
In
the
event that the consignment agreements are cancelled sometime in the future,
then
HLS would lose the control of the companies to the extent that the stock was
not
previously transferred to it. Such transfer due to termination would likely
be
for no value, and could be as a result of a breach by HollySys Holdings,
although there are no real obligations for HollySys Holdings under the
agreements.
Officers
of the Combined Company
After
the
consummation of the stock purchase, the board of directors will appoint the
following executive officers:
|
·
|
Dr.
Wang Changli as the chief executive officer,
and
|
|
·
|
Madame
Qiao Li as the chairperson.
|
CHARDAN
REDOMESTICATION MERGER
General
Chardan
is reincorporating in the British Virgin Islands and in that process changing
its name and corporate documents and establishing a new board of directors.
The
Redomestication Merger is an obligation under the stock purchase agreement
with
the HollySys Stockholders.
We
believe that the reincorporation in the British Virgin Islands (BVI) will give
the continuing company more flexibility and simplicity in various corporate
transactions. We also believe that being reincorporated in the BVI will
facilitate and reduce the costs of any further reorganization of the HollySys
Operating Companies and permit the creation and acquisition of additional
companies in China as the business of HollySys expands. We believe that the
reincorporation will reduce taxes and other costs of doing business by HLS
in
the future because its operations will be in China after the acquisition. The
BVI has adopted an International Business Companies Act that allows for flexible
and creative corporate structures for international businesses. Further, BVI
international business companies are wholly exempt from BVI tax on their income.
As part of the reincorporation, Chardan’s corporate name will be that of the
surviving company, “HLS Systems International, Ltd.”
The
full
texts of the Plan of Merger and the Memorandum and Articles of Association
of
HLS are set forth in annexes to this proxy statement/prospectus. The discussion
of these documents and the comparison of rights set forth below are qualified
in
their entirety by reference to those annexes.
Adoption
of the Redomestication Merger
The
board
of directors has approved the reincorporation plan and Redomestication Merger
and recommends that the stockholders of Chardan approve it.
The
affirmative vote of the holders of a majority of the shares outstanding of
Chardan is required for approval of the reincorporation plan and Redomestication
Merger. Abstentions and broker non-votes will have the effect of a vote against
the proposal.
The
reincorporation plan will not be implemented if the stock purchase agreement
is
not approved or the stock purchase is not consummated. The stock purchase will
not be consummated if Chardan does not reincorporate in the BVI.
The
board
of directors unanimously recommends a vote “FOR” the approval of the
reincorporation plan and Redomestication Merger.
Plan
of Reincorporation and Redomestication Merger
The
reincorporation will be achieved by the merger of Chardan, a Delaware company,
with and into HLS, a BVI corporation, which is wholly owned by Chardan at this
time, with HLS being the surviving entity. The Memorandum of Association and
the
Articles of Association, the equivalent of a certificate of incorporation and
bylaws of a United States company, of the surviving company will be those of
HLS, written in compliance with BVI law. The effectiveness of the
reincorporation and the merger is conditioned upon the filing by both Chardan
and HLS of a certificate of merger with the State of Delaware and articles
of
merger with the BVI. Upon the filing of these documents, Chardan will cease
its
corporate existence in the State of Delaware.
At
the
time of the Redomestication Merger, one new share of HLS will be issued for
each
outstanding share of common stock of Chardan held by our stockholders on the
effective date for the reincorporation. Each share of HLS that is owned by
Chardan will be canceled and resume the status of authorized and unissued HLS
common stock. The Chardan shares no longer will be eligible to trade on the
over-the-counter bulletin board market. The shares of HLS will be eligible
to
trade in their place beginning on or about the effective date of the
reincorporation under a new CUSIP number and trading symbol. The symbol will
be
assigned if the market will be the OTCBB or will be as determined with the
approval of Nasdaq if that is where the shares will trade upon consummation
of
the stock purchase.
Your
percentage ownership of Chardan will not be affected by the reincorporation.
As
part of the stock purchase transaction, however, there will be the issuance
of
additional shares of common stock as partial consideration for the HollySys
Companies. As part of the reincorporation, HLS will assume the outstanding
warrants of Chardan on the same terms as currently issued. In addition, HLS
will
assume all other outstanding obligations of Chardan and succeed to those
benefits enjoyed by Chardan. The business of Chardan, upon the reincorporation
and the acquisition of the HollySys Companies will become that of
HollySys.
You
do
not need to replace the current stock certificate of Chardan after the
Redomestication Merger. DO NOT DESTROY YOUR CURRENT STOCK CERTIFICATES ISSUED
BY
CHARDAN. The issued and outstanding stock certificates of Chardan will represent
the rights that our stockholders will have in HLS. Stockholders, however, may
submit their stock certificates to our transfer agent, Continental Stock
Transfer and Trust Company, 17 Battery Place, New York, New York 10004
(212-509-4000) for new certificates, subject to normal requirements as to proper
endorsement, signature guarantee, if required, and payment of applicable
taxes.
If
you
have lost your certificate, you can contact our transfer agent to have a new
certificate issue. You may be requested to post a bond or other security to
reimburse us for any damages or costs if the lost certificate is later delivered
for sale or transfer.
Management
of HLS
The
directors of HLS will be nine persons. These will be Wang Changli, Qiao Li,
Sun
Dongying, Kerry S. Propper, and five independent directors. The officers of
HLS will be Dr. Wang Changli (chief executive officer) and Madame Qiao Li
(chairperson). See “Directors and Management of the Combined Company following
the Stock Purchase.”
Wang
Changli and Qiao Li will be employed by HollySys Holdings pursuant to written
employment agreements described above.
Appraisal
Rights
If
the
Redomestication Merger occurs, the Chardan stockholders who do not vote in
favor
of the Redomestication Merger have the right to demand in cash the fair value
of
their Chardan shares (exclusive of any element of value arising from the
accomplishment or expectation of the merger) instead of taking the surviving
corporation’s common stock. Holders of options or warrants to purchase Chardan
common stock do not have any appraisal rights.
Chardan
common stock will not be converted into surviving corporation common stock
if
the holder of the shares validly exercises and perfects statutory appraisal
rights with respect to the shares. When and if the holder of those shares
withdraws the demand for appraisal or otherwise becomes ineligible to exercise
appraisal rights, the shares will automatically convert into shares of the
surviving corporation common stock on the same basis as the other shares that
convert in the Redomestication Merger.
To
perfect the appraisal right, stockholders must not vote in favor of the
Redomestication Merger and must then mail or deliver a written demand for
appraisal, before the taking of the vote on the merger at the special meeting
of
Chardan stockholders. This written demand must be separate from any written
consent or vote against approval of the Redomestication Merger. Voting against
approval of the Redomestication Merger or failing to vote on the proposal will
not constitute a demand for appraisal within the meaning of Section 262 of
the
Delaware General Corporations Law. The written demand should be delivered
to:
Chardan
North China Acquisition Corporation
625
Broadway, Suite 1111
San
Diego, CA 92101
Attention:
Dr. Richard Propper
A
written
demand for appraisal of the Chardan shares is only effective if it reasonably
informs Chardan of the identity of the stockholder and that the stockholder
demands appraisal of his, her or its shares. Accordingly, the written demand
for
appraisal should specify the stockholder’s name and mailing address, the number
of shares of Chardan stock owned and that the stockholder is thereby demanding
appraisal.
A
dissenting stockholder who is the record owner, such as a broker, of Chardan
stock as a nominee for others, may exercise a right of appraisal with respect
to
the common stock held for one or more beneficial owners, while not exercising
such right for other beneficial owners. In that case, the record stockholder
should specify in the written demand the number of shares as to which the
stockholder wishes to demand appraisal. If the written demand does not expressly
specify the number of shares, Chardan will assume that the written demand covers
all the shares of Chardan common stock that are in the nominee’s
name.
It
is
important that Chardan receive all written demands promptly as provided above.
Failure to comply with any of these conditions will result in the stockholder
only being entitled to receiving the shares of HLS in the Redomestication
Merger.
Dissenting
stockholders must not vote to approve the Redomestication Merger. If a
dissenting stockholder votes in favor of the merger, the stockholder’s right to
appraisal will terminate, even if the stockholder previously filed a written
demand for appraisal. A vote against approval of the Redomestication Merger
is
not required in order to exercise appraisal rights.
Dissenters
must continuously hold their shares of Chardan common stock from the date they
make the demand for appraisal through the closing of the Redomestication Merger.
Record holders of Chardan common stock who make the appraisal demand, but
subsequently sell their shares of common stock prior to the merger will lose
any
right to appraisal in respect of the sold shares.
Within
120 days after the effective date of the merger, either the surviving
corporation or any stockholder who has complied with the conditions of Section
262 may file a petition in the Delaware Court of Chancery demanding that the
Chancery Court determine the fair value of the shares of stock held by all
the
stockholders who are entitled to appraisal rights. Neither Chardan nor the
surviving corporation has any intention at this time of filing this petition.
Because the surviving corporation has no obligation to file this petition,
if no
dissenting stockholder files this petition within 120 days after the closing,
the dissenting stockholder may lose its rights of appraisal.
A
dissenting stockholder who no longer wishes to exercise appraisal rights must
withdraw the holder’s demand for appraisal rights within 60 days after the
effective date of the Redomestication Merger. A stockholder also may withdraw
a
demand for appraisal after 60 days after the effective date of the merger,
but
only with the written consent of the surviving corporation. If a stockholder
effectively withdraws a demand for appraisal rights, the stockholder will
receive the merger consideration provided in the Redomestication
Merger.
If
the
stockholder is in compliance with the demand requirements, the stockholder
is
entitled to receive from the surviving corporation a statement setting for
the
aggregate number of shares for which appraisal has been demanded and the
aggregate number of stockholders making the demand. To obtain this statement,
the stockholder must make a written demand to the surviving corporation within
120 days after the effective date of the Redomestication Merger. The surviving
corporation must make the statement before the later of (i) the 10th day after
receiving such request or (ii) the 10th day after the expiration of the period
within which demand for appraisal rights must be made.
If
a
Chancery Court proceeding is commenced by a dissenting stockholder, the
surviving corporation has 20 days to provide the court with the names of
dissenting stockholders with which it has not settled a claim for appraisal.
The
court may then send notice of a hearing to all the stockholders demanding
appraisal rights, and then conduct a hearing to determine whether the
stockholders have fully complied with Section 262 and their entitlement to
the
appraisal rights under that section. The court may require deposit of the stock
certificates of dissenting stockholders with the court. A dissenting stockholder
who does not follow this requirement may be dismissed from the
proceeding.
The
Chancery Court will determine the value of the shares. To determine the fair
value, the court will consider all relevant factors, and will exclude any
appreciation or depreciation due to the anticipation or accomplishment of the
Redomestication Merger. Whether or not an investment banking firm has determined
that the merger is fair is not an opinion that the merger consideration is
fair
value under Section 262. Upon determination of the value, the surviving
corporation will be ordered to pay that value, together with simple or compound
interest as the court directs. To receive payment, the dissenting stockholders
must surrender their stock certificates to the surviving
corporation.
The
costs
of the appraisal proceeding may be assessed against the surviving corporation
and the stockholders as the court determines.
Differences
of Stockholder Rights
Upon
the
completion of the reincorporation, the memorandum and articles of association
of
HLS will become the governing documents of the surviving corporation. Although
the corporate statutes of Delaware and the British Virgin Islands are similar,
certain differences exist. The most significant differences, in the judgment
of
the management of Chardan are summarized below. Stockholders should refer to
the
annexes of the memorandum and articles of association and to the Delaware
corporate law and corporate law of the British Virgin Islands, including the
Business Companies Act (“BCA”) to understand how these laws apply to Chardan and
HLS and may affect you. Neither British Virgin Islands law nor the memorandum
and articles of association of HLS impose any limitations on the right of
nonresident or foreign owners to hold or vote securities. Under the British
Virgin Islands law, holders of a company’s stock are referred to as members, as
opposed to stockholders, which reference is carried through in the
table.
|
Provision
|
Chardan
|
HLS
|
||
|
Number
of Authorized Shares
|
21
million shares of which 20 million are shares of common stock, $.0001
par
value per share and 1 million are shares of preferred stock, par
value
$.0001 per share
|
101
million shares of which 100 million are ordinary shares; and 1 million
are
preference shares, each with a par value of $.001 per
share
|
||
|
Par
Value
|
Stated
in United States dollars.
Changes
in capital generally require stockholder approval
|
No
par value
Changes
in capital may be made upon resolution of members or
directors.
|
||
|
Preferred
(Preference) Shares
|
Directors
may fix the designations, powers, preferences, rights, qualifications,
limitations and restrictions by resolution.
|
Same
as Chardan, but subject to the memorandum.
|
||
|
Registered
Shares
|
Shares
of capital stock of Chardan to be registered shares.
|
Same
as Chardan
|
||
|
Purpose
of Corporation
|
To
engage in any lawful act not prohibited by law.
|
Same
as Chardan subject to the prohibition of conducting certain business
activities in the BVI (
i.e.,
banking,
insurance and local BVI businesses).
|
||
|
Amendment
of Certificate of Incorporation
|
Requires
stockholder vote and, except in limited circumstances, by the board
of
directors.
|
Requires
vote of the members, being a person that holds shares, or as permitted
by
the BCA by the board of directors and articles.
|
||
|
Registered
Office
|
9
East Loockerman Street
Kent
County
Dover,
Delaware
|
P.O.
Box 173
Kingston
Chambers
Road
Town,
Tortola,
British Virgin Islands
|
||
|
Transfer
Agent
|
Continental
Stock Transfer & Trust Company
|
Same
as Chardan
|
||
|
Voting
Rights
|
Common
stock: one share, one vote on all matters before the holders of the
common
stock.
Other
classes of equity may have voting rights as assigned to them by the
board
of directors or as approved by stockholders.
Directors
elected by plurality, all other matters either by majority of issued
and
outstanding or majority of those present and entitled to vote as
specified
by law.
|
Same
as Chardan
Directors
elected by plurality as provided in memorandum and articles; all
other
matters by a majority of those shares present and entitled to
vote.
|
|
Redemption
of Equity
|
Shares
may be repurchased or otherwise acquired, provided the capital of
the
company will not be impaired by the acquisition.
Company
may hold or sell treasury shares.
|
Same
as Chardan
|
||
|
Stockholder/Member
consent
|
Permitted
as required for a vote at a meeting
|
Same
as Chardan
|
||
|
Notice
Requirements for Stockholder/Member Nominations and Other
Proposals
|
In
general, to bring a matter before an annual meeting or to nominate
a
candidate for director, a stockholder must give notice of the proposed
matter or nomination not less than 60 days and not more than 90 days
prior
to public disclosure of the date of annual meeting.
In
the event that less than 70 days notice or prior public disclosure
of the
date of the meeting is given or made to stockholder, to be timely,
the
notice must be received by the company no later than the close of
business
on the 10th
day
following the day on which such notice of the date of the meeting
was
mailed or public disclosure was made, whichever first
occurs.
|
To
bring a matter before an annual meeting or to nominate a candidate
for
director, a member must give notice to the company of not less than
30
days nor more than 60 days.
If
the member is making a proposal on a matter or nominating a candidate
for
director and there is less than 40 days notice or prior public disclosure
of the date is given or made to members, to be timely, must be received
no
later than the close of business on the 10th day following the day
on
which such notice of the date of the meeting was mailed or such public
disclosure was made.
|
||
|
Meetings
of Stockholders/Members - Presence
|
In
person or by proxy or other appropriate electronic means.
|
In
person or by proxy or by any teleconference means where persons can
hear
one another.
|
||
|
Meeting
of Stockholder/Member - Notice
|
Not
less than 10 days or more than 60 days.
|
Not
less than seven days; no maximum limit.
|
||
|
Meeting
of Stockholders/Members - Call of Meeting
|
Regular
and annual meetings shall be called by the directors. Special meetings
may
be called only by majority of board of directors, chief executive
officer
or by a majority of the issued and outstanding capital stock entitled
to
vote.
|
Meetings
may be called by the directors or by members holding 30 percent of
the
outstanding votes. The articles require an annual meeting of the
members
for the election of directors to be called by the directors.
Meetings
on short notice may be called upon waiver or presence of all the
members
holding shares entitled to vote or 90% of the total number of shares
entitled to vote agree to short notice.
|
||
|
Meeting
of Stockholders /Members- Place
|
Within
or without Delaware
|
Within
or outside the BVI as the directors consider necessary or
desirable.
|
||
|
Meeting
of Stockholders/Members - Quorum
|
Majority
of the capital stock issued and outstanding and entitled to vote
at
meeting. Meeting may be adjourned for up to 30 days without additional
notice to stockholders.
|
One-half
of the votes of the shares of each class or series entitled to vote.
Adjournment for such time as directors determine.
|
||
|
Meeting
of Stockholders/Members - Record Date
|
As
fixed by the directors, no more than 60 days and no less than 10
days
before the meeting. If not fixed, the day before notice of meeting
is
given.
|
As
fixed by the directors
|
||
|
Directors
- Election
|
By
the stockholders as entitled by their terms, including the holders
of
common stock.
|
By
the members as entitled by their terms, including the holders of
common
stock
|
||
|
Directors
- Term
|
Staggered
board of three classes; for terms of three years
|
Annual
term
|
||
|
Directors
- Removal
|
By
the stockholders for cause.
|
By
resolution of the members for cause or without cause on a vote of
the
members representing 66-2/3 of the shares entitled to vote or the
directors for any reason on a resolution signed by all the other
directors
absent from meetings for six months without leave of the board, death
or
incapacity.
|
||
|
Directors
- Vacancy
|
May
be filled by majority of remaining directors (unless they are the
result
of the action of stockholders) and newly created vacancies may be
filled
by majority of remaining directors.
|
May
be filled by members or the board of directors.
|
||
|
Directors
- Number
|
Unless
established by certificate of incorporation, as determined by board
of
directors, but not less than one.
|
Same
as Chardan.
|
||
|
Directors
- Quorum and Vote Requirements
|
A
majority of the entire board. The affirmative vote of a majority
of
directors present at a meeting at which there is a quorum constitutes
action by the board of directors.
|
One-half
of the total number of directors, present in person or by alternate,
except if there are only two or less directors then a quorum will
be all
the directors.
|
||
|
Directors
- Managing Director
|
Not
applicable
|
Provision
for the board to select one or more directors to be managing directors,
provide for special remuneration and assign such powers as the board
determines so long as it is not a power that requires board
approval.
|
||
|
Directors
- Powers
|
All
powers to govern the corporation not reserved to the
stockholders.
|
Same
as Chardan
|
||
|
Directors
- Committees
|
Directors
may establish one or more committees with the authority that the
board
determines.
|
Same
as Chardan
|
||
|
Provision
|
Chardan
|
HLS
|
|
Directors
- Consent Action
|
Directors
may take action by written consent of all directors, in addition
to action
by meeting.
|
By
written consent in same manner as if at a meeting in persons, by
directors
or by alternate.
|
||
|
Director
- Alternates
|
Not
permitted
|
Directors
may, by written instrument, appoint an alternate who need not be
a
director, who may attend meetings in the absence of the director
and vote
and consent in the place of the directors.
|
||
|
Directors
- Appoint Officers
|
Directors
appoint the officers of the corporation, subject to the by-laws,
with such
powers as they determine.
|
Same
as Chardan, subject to the articles of association
|
||
|
Director
- Limitation of Liability
|
Directors
liability is limited, except for (i) breach of loyalty, (ii) act
not in
good faith or which involves international misconduct or a knowing
violation of law, (iii) willful violation of law in respect of payment
of
dividend or redeeming shares, or (iv) actions in which director receives
improper benefit.
|
Duty
to act honestly and in good faith with a view to the best interests
of the
company and exercise care, diligence and skill of a reasonably prudent
person acting in comparable circumstances. No provisions in the
memorandum, articles or agreement may relieve a director, officer,
or
agent from the duty to act in accordance with the memorandum or articles
or from personal liability arising from the management of the business
or
affairs of the company.
|
||
|
Director
- Indemnification Insurance
|
Company
may purchase insurance in relation to any person who is or was a
director
or officer of the company.
|
Same
as Chardan, extends to a liquidator of the company.
|
||
|
Amendments
to Organizational Documents
|
Amendments
must be approved by the board of directors and by a majority of the
outstanding stock entitled to vote on the amendment, and if applicable,
by
a majority of the outstanding stock of each class or series entitled
to
vote on the amendment as a class or series. By-laws may be amended
by the
stockholders entitled to vote at any meeting or, if so provided by
the
certificate of incorporation, by the board of directors.
|
Amendments
to the memorandum and articles may be made by resolution of the members
or
by the directors.
|
||
|
Sale
of Assets
|
The
sale of all or substantially all the assets of the company requires
stockholder approval.
|
The
sale of more than 50% of the assets of the company requires member
approval.
|
||
|
Dissenters
Rights
|
Provision
is made under Delaware corporate law to dissent and obtain fair value
of
shares in connection with certain corporate actions that require
stockholder approval or consent.
|
Provision
is made under the BCA to dissent and obtain fair value of shares
in
connection with certain corporate actions that require member approval
or
consent.
|
Indemnification
Of Officers And Directors
As
indicated in the comparison of charter provisions, a director, officer or agent
of a company formed under the laws of the British Virgin Islands is obligated
to
act honestly and in good faith and exercise care, diligence and skill of a
reasonably prudent person acting in comparable circumstances. The Memorandum
and
Articles of HLS do not relieve directors, officers or agents from personal
liability arising from the management of the business of the company.
Notwithstanding the foregoing, Section 132 of the Business Companies Act of
the
British Virgin Islands may indemnify directors, officers and agents against
all
expenses, including legal fees and judgments, fines and settlements, in respect
of actions related to their employment. The stock purchase agreement provides
indemnification in respect of the representations, warranties and covenants
of
the parties, some of which may relate to the securities laws of the United
States. There are no agreements that relieve directors, officer or agents from
personal liability. HLS is permitted and intends to obtain director and officer
insurance.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933,
as
amended, may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, HLS and Chardan have been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy, as expressed in the Securities Act
of
1933, as amended, and is, therefore, unenforceable.
Defenses
Against Hostile Takeovers
While
the
following discussion summarizes the reasons for, and the operation and effects
of, the principal provisions of HLS’s Memorandum and Articles of Association
that management has identified as potentially having an anti-takeover effect,
it
is not intended to be a complete description of all potential anti-takeover
effects, and it is qualified in its entirety by reference to the full texts
of
HLS’s Memorandum and Articles of Association.
In
general, the anti-takeover provisions of HLS’s Memorandum and Articles of
Association are designed to minimize susceptibility to sudden acquisitions
of
control that have not been negotiated with and approved by HLS’s board of
directors. As a result, these provisions may tend to make it more difficult
to
remove the incumbent members of the board of directors. The provisions would
not
prohibit an acquisition of control of HLS or a tender offer for all of HLS’s
capital stock. The provisions are designed to discourage any tender offer or
other attempt to gain control of HLS in a transaction that is not approved
by
the board of directors, by making it more difficult for a person or group to
obtain control of HLS in a short time and then impose its will on the remaining
stockholders. However, to the extent there provisions successfully discourage
the acquisition of control of HLS or tender offers for all or part of HLS’s
capital stock without approval of the board of directors, they may have the
effect of preventing an acquisition or tender offer which might be viewed by
stockholders to be in their best interests.
Tender
offers or other non-open market acquisitions of stock will generally be made
at
prices above the prevailing market price of HLS’s stock. In addition,
acquisitions of stock by persons attempting to acquire control through market
purchases may cause the market price of the stock to reach levels that are
higher than would otherwise be the case. Anti-takeover provisions may discourage
such purchases, particularly those of less than all of HLS’s stock, and may
thereby deprive stockholders of an opportunity to sell their stock at a
temporarily higher price. These provisions may therefore decrease the likelihood
that a tender offer will be made, and, if made, will be successful. As a result,
the provisions may adversely affect those stockholders who would desire to
participate in a tender offer. These provisions may also serve to insulate
incumbent management from change and to discourage not only sudden or hostile
takeover attempts, but also any attempts to acquire control that are not
approved by the board of directors, whether or not stockholders deem such
transactions to be in their best interest.
Stockholder
Meetings
.
British
Virgin Island law provides that stockholder meetings shall be convened by the
board of directors at any time or upon the written request of stockholders
holding more than 30% of the votes of the outstanding voting shares of the
company. HLS’s Articles of Association provide that annual stockholder meetings
for the election of directors may be called only by the directors.
Number
of Directors and Filling Vacancies on the Board of Directors
.
British
Virgin Island law requires that the board of directors of a company consist
of
one or more members and that the number of directors shall be set by the
corporation’s Articles of Association, with a minimum of one director. HLS’s
Articles of Association provide that the number of directors shall be not less
than one, subject to any subsequent amendment to change the number of directors.
The power to determine the number of directors is vested in the board of
directors. The power to fill vacancies, whether occurring by reason of an
increase in the number of directors or by resignation, is vested primarily
in
the board of directors. Directors may be removed by the members only for cause
or without cause on a vote of the members representing 66-2/3 of the shares
entitled to vote.
Election
of Directors
.
Under
British Virgin Island law, there is no cumulative voting by stockholders for
the
election of the directors. The absence of cumulative voting rights effectively
means that the holders of a majority of the stock voted at a stockholders
meeting may, if they so choose, elect all directors of HLS, thus precluding
a
small group of stockholders from controlling the election of one or more
representatives to the board of directors.
Advance
Notice Requirements for Nomination of Directors and Presentation of New Business
at Meetings of Stockholders; Action by Written Consent
.
The HLS
Articles of Association will provide for advance notice requirements for
stockholder proposals and nominations for director. Generally, to be timely,
notice must be delivered to the secretary of HLS at its principal executive
offices not fewer than 30 days nor more than 60 days prior to the first
anniversary date of the annual meeting for the preceding year. Special meetings
may be called by HLS’s board of directors or by stockholders comprising 50% of
the combined voting power of the holders of the then outstanding shares entitled
to vote. These provisions make it more procedurally difficult for a stockholder
to place a proposal or nomination on the meeting agenda or to take action
without a meeting, and therefore may reduce the likelihood that a stockholder
will seek to take independent action to replace directors or seek a stockholder
vote with respect to other matters that are not supported by
management.
Rights
of Minority Shareholders
Under
the
law of the British Virgin Islands, there is little statutory law for the
protection of minority shareholders. The principal protection under statutory
law is that shareholders may bring an action to enforce the constituent
documents of the corporation, the Articles and the Memorandum of Association.
Shareholders are entitled to have the affairs of the company conducted in
accordance with the general law and the articles and memorandum. The company
is
obliged to hold an annual general meeting and provide for the election of
directors. Companies are obligated to appoint an independent auditor and
shareholders are entitled to receive the audited financial statements of the
company.
There
are
common law rights for the protection of shareholders that may be invoked,
largely dependent on English company law, since the common law of the British
Virgin Islands for business companies is limited. Under the general rule
pursuant to English company law known as the rule in
Foss
v. Harbottle
,
a court
will generally refuse to interfere with the management of a company at the
insistence of a minority of its shareholders who express dissatisfaction with
the conduct of the company’s affairs by the majority or the board of directors.
However, every shareholder is entitled to have the affairs of the company
conducted properly according to law and the constituent documents of the
corporation. As such, if those who control the company have persistently
disregarded the requirements of company law or the provisions of the company’s
memorandum of association or articles, then the courts will grant relief.
Generally, the areas in which the courts will intervene are the following:
(i)
an act complained of which is outside the scope of the authorized business
or is
illegal or not capable of ratification by the majority, (ii) acts that
constitute fraud on the minority where the wrongdoers control the company,
(iii)
acts that infringe on the personal rights of the shareholders, such as the
right
to vote, and (iv) where the company has not complied with provisions requiring
approval of a special or extraordinary majority of shareholders.
Under
the
law of Delaware, the rights of minority shareholders are similar to that which
will be applicable to the shareholders of HLS. The principal difference, as
discussed elsewhere will be the methodology and the forum for bringing such
an
action. It is also generally the case that the Delaware courts can exercise
a
wide latitude in interpretation and wide discretion in fashioning remedies
as
they think fits the circumstances for the regulation of the company. Under
English precepts of the law of minority shareholders, there is generally a
more
restricted approach to the enforcement of the rights through the interpretation
of the law, articles and memorandum.
Federal
Income Tax Consequences of the Reincorporation
The
Redomestication Merger has been structured to qualify as a reorganization under
section 368(a) of the Code for federal income tax purposes. For United States
federal income tax purposes, no gain or loss will be recognized by the
stockholders of Chardan who receive HLS common stock for their Chardan common
stock in connection with the Redomestication Merger. The aggregate tax basis
of
the HLS common stock received by a Chardan stockholder in connection with the
Redomestication Merger will be the same as the aggregate tax basis of the
Chardan common stock surrendered in exchange for HLS common stock. A stockholder
who holds Chardan common stock will include in his holding period for the HLS
common stock that he receives his holding period for the Chardan common stock.
Chardan, however, will recognize gain, but not loss, as a result of the
Redomestication Merger equal to the difference, if any, between the adjusted
tax
basis of any Chardan asset and such asset’s fair market value at the effective
time of the Redomestication Merger. There is no reciprocal tax treaty between
the British Virgin Islands and the United States regarding
withholding.
State,
local or foreign income tax consequences to stockholders may vary from the
federal income tax consequences described above, and STOCKHOLDERS ARE URGED
TO
CONSULT THEIR OWN TAX ADVISOR AS TO THE CONSEQUENCES TO THEM OF THE
REINCORPORATION UNDER ALL APPLICABLE TAX LAWS.
Transfer
of HLS Securities Upon Death of Holder
Because
HLS is a BVI company, the transfer of the securities of HLS, including the
common stock and warrants, for estate administration purposes will be governed
by BVI law. This may require that the estate of a decedent security holder
of
HLS seek to probate or transfer under letters of administration for the estate
issued by a court in the BVI. HLS has attempted to modify this requirement
by
inserting in its Articles of Association a provision that permits the board
of
directors to decide whether or not to permit decedent transfers based on estate
documentation from jurisdictions other than the BVI, more in accordance with
United States practice, without any action having to be taken in the BVI. The
board of directors intends to follow this procedure. There is no assurance
that
this will result in an enforceable transfer. The board of directors will be
fully indemnified for its actions in this regard pursuant to the Articles of
Association.
CHARDAN
2006 EQUITY PLAN
Background
The
Chardan board of directors has approved the “2006 Stock Plan,” subject to
stockholder approval. The plan reserves 3,000,000 shares of Chardan common
stock for issuance in accordance with the plan’s terms. The purpose of the stock
option plan is to enable Chardan to offer its employees, officers, directors
and
consultants whose past, present and/or potential contributions to Chardan have
been, are or will be important to the success of Chardan, an opportunity to
acquire a proprietary interest in Chardan. The various types of incentive awards
that may be provided under the stock option plan will enable Chardan to respond
to changes in compensation practices, tax laws, accounting regulations and
the
size and diversity of its business.
There
are
approximately 1,000 persons who will be eligible to be granted awards,
including directors, officers and employees of the HollySys Operating Companies,
HollySys Holdings and HLS. No allocations of shares that may be subject to
awards have been made in respect of the executive officers or any other group.
All awards will be subject to the recommendations of management and the
compensation committee and approval by the board of directors or the stock
option committee.
A
summary of the principal features of the stock option plan is provided below,
but is qualified in its entirety by reference to the full text of the plan
which
is attached to this proxy statement/prospectus as an
annex.
Shares
Available
The
stock
plan reserves 3,000,000 shares of common stock for awards. If Chardan’s
stockholders approve this proposal, the total number of shares of common stock
available for issuance under the stock plan will be subject to the adjustments
described below.
Administration
The
stock
plan is administered by our compensation committee. Under the stock plan, the
compensation committee has full authority, subject to the provisions of the
plan, to award any of the following, either alone or in tandem with each
other:
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stock
options;
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stock
appreciation rights;
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restricted
stock;
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restricted
stock units;
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performance
units and shares
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deferred
compensation awards; and
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other
stock-based awards.
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Subject
to the provisions of the stock plan, the compensation committee determines,
among other things, the persons to whom from time to time awards may be granted,
the specific type of award to be granted, the number of shares subject to each
award, share prices, any restrictions or limitations on the awards, and any
vesting, exchange, deferral, surrender, cancellation, acceleration, termination,
exercise or forfeiture provisions related to the awards. The interpretation
and
construction by the compensation committee of any provisions of, and the
determination by the compensation committee of any questions arising under,
the
plan or any rule or regulation established by the compensation committee
pursuant to the plan is final and binding on all persons interested in the
plan.
Stock
subject to the plan
The
plan
authorizes a total of 3,000,000 shares of common stock to be granted as
awards under the plan. In order to prevent the dilution or enlargement of the
rights of holders under the plan, our compensation committee may determine
whether or not to adjust the terms of the awards or the number of shares
reserved for issuance under the plan in the event of any stock split, reverse
stock split, stock dividend payable on our shares of common stock, combination
or exchange of shares, or other extraordinary event occurring after the grant
of
an award. Shares of our common stock that are awarded under the plan may be
either treasury shares or authorized but unissued shares. Treasury shares are
those purchased or acquired by us from a stockholder or in the public market.
If
any award granted under the plan is forfeited or terminated, the shares of
common stock reserved for issuance pursuant to the award will be made available
for future award grants under the plan.
Eligibility
Subject
to the provisions of the plan, awards may be granted to key employees, officers,
directors and consultants who are deemed to have rendered or are able to render
significant services to us or our subsidiaries and who are deemed to have
contributed or to have the potential to contribute to our success. Incentive
stock options may only be awarded to individuals who are our employees at the
time of grant. Notwithstanding the foregoing, an award may be granted to an
individual in connection with his or her hiring or retention, or at any time
on
or after the date he or she reaches an agreement with us, either oral or in
writing, with respect to his or her hiring, even though it may be prior to
the
date he or she first performs services for us or our subsidiaries. However,
no
portion of any award of this nature can vest prior to the date that the
individual first performs the services he or she was hired or retained to
perform.
Types
of awards
Options
.
Under
the plan, our compensation committee may award to participants stock options
that:
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are
intended to qualify as “incentive stock options” within the meaning of
Section 422 of the Code; or
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are
not intended to be so qualified.
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Incentive
stock options may only be awarded to our employees and those of our
subsidiaries. To the extent that any stock option intended to qualify as an
incentive stock option does not so qualify it will constitute a non-incentive
stock option.
Our
compensation committee will fix the term of each stock option. However, an
incentive stock option may be granted only within the ten-year period commencing
from the effective date of the plan and may only be exercised within ten years
from the date of grant, or five years from the date of grant in the case of
a
participant who at the time the stock option is granted owns more than 10%
of
the total combined voting power of all of our classes of voting
securities.
The
exercise price of stock options granted under the plan will be determined by
our
compensation committee at the time of the grant, but in no event will the price
be less than the fair market value of the underlying common stock on the last
trading day prior to the date the stock option is granted. However, the exercise
price of an incentive stock option granted to a 10% stockholder will not be
less
than 110% of the fair market value of the shares on the last trading day prior
to the date the stock option is granted. The number of shares covered by
incentive stock options which may first become exercisable by a participant
in
any calendar year cannot have an aggregate fair market value in excess of
$100,000, measured at the date of grant.
The
compensation committee will determine the terms and conditions of stock options
and when they will become exercisable. Any requirement that options be exercised
in installments may be waived in whole or in part by the compensation
committee.
Payment
of the exercise price may be made in cash, in shares of our common stock owned
by the participant, in a combination of the two, or otherwise, as reflected
in
the applicable award agreement. Additionally, the compensation committee may
permit a participant to elect to pay the exercise price by irrevocably
authorizing a third party to sell shares of common stock, or a sufficient
portion of the shares, acquired upon exercise of the stock option and pay to
us
a sufficient portion of the sale proceeds to pay the entire exercise price
and
any tax withholding resulting from the exercise. The committee may also approve
the use of any other legal consideration to exercise a stock option. A
participant has no rights as a stockholder with respect to the shares of our
common stock underlying a stock option granted under the plan until shares
are
actually issued upon exercise of the stock option.
Stock
appreciation rights
. Under
the plan, our compensation committee may grant stock appreciation rights to
participants in tandem with or separate from stock options. A tandem stock
appreciation right entitles the holder to surrender to us all or a portion
of a
stock option in exchange for a number of shares of our common stock determined
by multiplying the excess of the fair market value per share of our common
stock
on the exercise date over the exercise price per share by the number of shares
subject to the stock option and then dividing it by the fair market value of
the
common stock on the date the stock appreciation right is exercised. In the
case
of an incentive stock option, a tandem stock appreciation right may only be
granted simultaneously with the grant of the underlying incentive stock option.
In the case of non-incentive stock option, a tandem stock appreciation right
may
be granted at or after the time of the grant of the underlying non-incentive
stock option. A tandem stock appreciation right will terminate upon termination
or exercise of the related stock option. Upon exercise of a tandem stock
appreciation right, the underlying stock option will be deemed to have been
exercised, and the related shares of our common stock will no longer be
available for issuance under the plan.
Restricted
Stock Awards
.
The
committee may grant restricted stock awards under the stock plan either in
the
form of a restricted stock purchase right, giving a participant an immediate
right to purchase common stock, or in the form of a restricted stock bonus,
for
which the participant furnishes consideration in the form of services to the
company. The committee determines the purchase price payable under restricted
stock purchase awards, which may be less than the then current fair market
value
of our common stock. Restricted stock awards may be subject to vesting
conditions based on such service or performance criteria as the committee
specifies, including the attainment of one or more performance goals similar
to
those described below in connection with performance awards. Shares acquired
pursuant to a restricted stock award may not be transferred by the participant
until vested. Unless otherwise provided by the committee, a participant will
forfeit any shares of restricted stock as to which the restrictions have not
lapsed prior to the participant’s termination of service. Participants holding
restricted stock will generally have the right to vote the shares and to receive
any dividends paid, except that dividends or other distributions paid in shares
will be subject to the same restrictions as the original award.
Restricted
Stock Units
.
The
committee may grant restricted stock units under the stock plan, which represent
a right to receive shares of our common stock at a future date determined in
accordance with the participant’s award agreement. No monetary payment is
required for receipt of restricted stock units or the shares issued in
settlement of the award, the consideration for which is furnished in the form
of
the participant’s services to the company. The committee may grant restricted
stock unit awards subject to the attainment of one or more performance goals
similar to those described below in connection with performance awards, or
may
make the awards subject to vesting conditions similar to those applicable to
restricted stock awards. Unless otherwise provided by the committee, a
participant will forfeit any restricted stock units which have not vested prior
to the participant’s termination of service. Participants have no voting rights
or rights to receive cash dividends with respect to restricted stock unit awards
until shares of common stock are issued in settlement of such awards. However,
the committee may grant restricted stock units that entitle their holders to
receive dividend equivalents, which are rights to receive additional restricted
stock units for a number of shares whose value is equal to any cash dividends
we
pay.
Performance
Awards
.
The
committee may grant performance awards subject to such conditions and the
attainment of such performance goals over such periods as the determines in
writing and sets forth in a written agreement between the company and the
participant. To the extent compliance with Section 162(m) of the Code is
desired, a committee comprised solely of “outside directors” under Section
162(m) shall act with respect to performance awards. These awards may be
designated as performance shares or performance units. Performance shares and
performance units are unfunded bookkeeping entries generally having initial
values, respectively, equal to the fair market value determined on the grant
date of a share of common stock and a value set by the committee. Performance
awards will specify a predetermined amount of performance shares or performance
units that may be earned by the participant to the extent that one or more
predetermined performance goals are attained within a predetermined performance
period. To the extent earned, performance awards may be settled in cash, shares
of common stock (including shares of restricted stock) or any combination
thereof.
Prior
to
the beginning of the applicable performance period or such later date as
permitted under Section 162(m) of the Code, the committee will establish one
or
more performance goals applicable to the award. Performance goals will be based
on the attainment of specified target levels with respect to one or more
measures of business or financial performance of the company and each subsidiary
corporation consolidated with the company for financial reporting purposes,
or
such division or business unit of the company as may be selected by the
committee. The committee, in its discretion, may base performance goals on
one
or more of the following such measures: sales revenue, gross margin, operating
margin, operating income, pre-tax profit, earnings before interest, taxes,
depreciation and amortization, net income, expenses, the market price of our
common stock, earnings per share, return on stockholder equity, return on
capital, return on net assets, economic value added, market share, customer
service, customer satisfaction, safety, total stock holder return, free cash
flow, or other measures as determined by the committee. The target levels with
respect to these performance measures may be expressed on an absolute basis
or
relative to a standard specified by the committee. The degree of attainment
of
performance measures will be calculated in accordance with generally accepted
accounting principles, but prior to the accrual or payment of any performance
award for the same performance period, and, according to criteria established
by
the committee, excluding the effect (whether positive or negative) of changes
in
accounting standards or any extraordinary, unusual or nonrecurring item
occurring after the establishment of the performance goals applicable to a
performance award.
Following
completion of the applicable performance period, the committee will certify
in
writing the extent to which the applicable performance goals have been attained
and the resulting value to be paid to the participant. The committee retains
the
discretion to eliminate or reduce, but not increase, the amount that would
otherwise be payable on the basis of the performance goals attained to a
participant who is a “covered employee” within the meaning of Section 162(m) of
the Code. However, no such reduction may increase the amount paid to any other
participant. The committee may make positive or negative adjustments to
performance award payments to participants other than covered employees to
reflect the participant’s individual job performance or other factors determined
by the committee. In its discretion, the committee may provide for the payment
to a participant awarded performance shares of dividend equivalents with respect
to cash dividends paid on the company’s common stock. The committee may provide
for performance award payments in lump sums or installments. If any payment
is
to be made on a deferred basis, the committee may provide for the payment of
dividend equivalents or interest during the deferral period.
Unless
otherwise provided by the committee, if a participant’s service terminates due
to the participant’s death or disability prior to completion of the applicable
performance period, the final award value will be determined at the end of
the
performance period on the basis of the performance goals attained during the
entire performance period but will be prorated for the number of months of
the
participant’s service during the performance period. If a participant’s service
terminates prior to completion of the applicable performance period for any
other reason, the stock plan provides that, unless otherwise determined by
the
committee, the performance award will be forfeited. No performance award may
be
sold or transferred other than by will or the laws of descent and distribution
prior to the end of the applicable performance period.
Deferred
Compensation Awards
.
The
stock plan authorizes the committee to establish a deferred compensation award
program. If and when implemented, participants designated by the committee
who
are officers, directors or members of a select group of highly compensated
employees may elect to receive, in lieu of compensation otherwise payable in
cash or in lieu of cash or shares of common stock issuable upon the exercise
or
settlement of stock options, stock appreciation rights or performance share
or
performance unit awards, an award of deferred stock units. Each such stock
unit
represents a right to receive one share of our common stock at a future date
determined in accordance with the participant’s award agreement. Deferred stock
units are fully vested upon grant and will be settled by distribution to the
participant of a number of whole shares of common stock equal to the number
of
stock units subject to the award as soon as practicable following the earlier
of
the date on which the participant’s service terminates or a settlement date
elected by the participant at the time of his or her election to receive the
deferred stock unit award. Participants are not required to pay any additional
consideration in connection with the settlement of a deferred stock units.
A
holder of deferred stock units has no voting rights or other rights as a
stockholder until shares of common stock are issued to the participant in
settlement of the stock units. However, participants holding deferred stock
units will be entitled to receive dividend equivalents with respect to any
payment of cash dividends on an equivalent number of shares of common stock.
Such dividend equivalents will be credited in the form of additional whole
and
fractional stock units determined in accordance with a method specified by
the
committee in the participant’s award agreement. Prior to settlement, deferred
stock units may not be assigned or transferred other than by will or the laws
of
descent and distribution.
Other
stock-based awards
. Our
compensation committee may award other stock-based awards, subject to
limitations under applicable law, in addition to, or in lieu of, other awards
granted to participants under the plan. These other stock-based awards are
payable in, valued in, or otherwise based on, or related to, our shares of
common stock or dividends on our common stock. Subject to the terms of the
plan,
the compensation committee has complete discretion to determine the terms and
conditions of other stock-based awards. Other stock-based awards may be awarded
either alone, in addition to, or in tandem with any other awards under the
plan
or any other plan in effect.
Withholding
taxes
We
may
withhold, or require participants to remit to us, an amount sufficient to
satisfy any federal, state or local withholding tax requirements associated
with
awards under the plan. If permitted by our compensation committee, tax
withholding may be settled with shares of our common stock, including shares
that are part of the award that gives rise to the withholding
requirement.
Awards
may, in some cases, result in the deferral of compensation that is subject
to
the requirements of Code Section 409A. To date, the U.S. Treasury Department
and
Internal Revenue Service have issued only preliminary guidance regarding the
impact of Code Section 409A on the taxation of these types of awards. Generally,
to the extent that deferrals of these awards fail to meet certain requirements
under Code Section 409A, such awards will be subject to immediate taxation
and
tax penalties in the year they vest unless the requirements of Code Section
409A
are satisfied. It is the intent of the Company that awards under the 2006 Plan
will be structured and administered in a manner that complies with the
requirements of Code Section 409A.
Agreements;
Transferability
Stock
options, stock appreciation rights, restricted stock, deferred stock, stock
reload options and other stock-based awards granted under the plan will be
evidenced by agreements consistent with the plan in a form as prescribed by
the
compensation committee. Neither the plan nor agreements evidencing awards under
the plan confer any right to continued employment upon any holder of a stock
option, stock appreciation right, restricted stock, deferred stock, stock reload
option or other stock-based award. Further, except as:
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expressly
provided in the plan,
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expressly
provided in the grant of an award,
or
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discussed
above with respect to the transferability of stock options in certain
limited exceptions,
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all
agreements will provide that the right to exercise stock options, receive
restricted stock after the expiration of the restriction period or deferred
stock after the expiration of the deferral period, receive payment under other
stock-based awards, or exercise a stock appreciation right cannot be transferred
except by will or the laws of descent and distribution.
Stock
options may not be assigned or transferred by a participant except by will
or by
the laws of descent and distribution, and during the lifetime of a participant,
the stock options may only be exercisable by the person to whom it was granted,
or, to the extent of legal incapacity or incompetency, the participant’s
guardian or legal representative. Notwithstanding the foregoing, with the
approval of the compensation committee, a participant may transfer a
nonstatutory stock option:
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by
gift, for no consideration, or pursuant to a domestic relations order,
in
either case, to or for the benefit of the participant’s immediate family;
or
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to
an entity in which the participant or members of the participant’s
immediate family own more than fifty percent of the voting interest,
in
exchange for an interest in that
entity.
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Additionally,
the transfer will be subject to any additional limits that the compensation
committee may establish and the execution of any documents that the compensation
committee may require. If a transfer of this nature is made, the transferee
shall remain subject to all the terms and conditions applicable to the stock
option prior to the transfer.
Term
and amendments
The
plan
will terminate when there are no awards outstanding and when no further awards
may be granted. Our board of directors has the right to amend, suspend or
discontinue any provision of the plan, provided that the action may not
adversely affect awards previously granted between a participant and us without
the participant’s consent.
Federal
income tax consequences
Incentive
Stock Options.
An
optionee recognizes no taxable income for regular income tax purposes as the
result of the grant or exercise of an incentive stock option. Optionees who
do
not dispose of their shares for two years following the date the incentive
stock
option was granted or within one year following the exercise of the option
will
normally recognize a long-term capital gain or loss equal to the difference,
if
any, between the sale price and the purchase price of the shares. If an optionee
satisfies both such holding periods upon a sale of the shares, we will not
be
entitled to any deduction for federal income tax purposes. If an optionee
disposes of shares either within two years after the date of grant or within
one
year from the date of exercise (referred to as a “disqualifying disposition”),
the difference between the fair market value of the shares on the exercise
date
and the option exercise price (not to exceed the gain realized on the sale
if
the disposition is a transaction with respect to which a loss, if sustained,
would be recognized) will be taxed as ordinary income at the time of
disposition. Any gain in excess of that amount will be a capital gain. If a
loss
is recognized, there will be no ordinary income, and such loss will be a capital
loss. A capital gain or loss will be long-term if the optionee’s holding period
is more than 12 months. Any ordinary income recognized by the optionee upon
the
disqualifying disposition of the shares generally should be deductible by the
Company for federal income tax purposes, except to the extent such deduction
is
limited by applicable provisions of the Code or the regulations thereunder.
The
difference between the option exercise price and the fair market value of the
shares on the exercise date of an incentive stock option is an adjustment in
computing the optionee’s alternative minimum taxable income and may be subject
to an alternative minimum tax which is paid if such tax exceeds the regular
tax
for the year. Special rules may apply with respect to certain subsequent sales
of the shares in a disqualifying disposition, certain basis adjustments for
purposes of computing the alternative minimum taxable income on a subsequent
sale of the shares and certain tax credits which may arise with respect to
optionees subject to the alternative minimum tax.
Nonstatutory
Stock Options and Stock Appreciation Rights.
Nonstatutory stock options and stock appreciation rights have no special tax
status. A holder of these awards generally does not recognize taxable income
as
the result of the grant of such award. Upon exercise of a nonstatutory stock
option or stock appreciation right, the holder normally recognizes ordinary
income in an amount equal to the difference between the exercise price and
the
fair market value of the shares on the exercise date. If the holder is an
employee, such ordinary income generally is subject to withholding of income
and
employment taxes. Upon the sale of stock acquired by the exercise of a
nonstatutory stock option or stock appreciation right, any gain or loss, based
on the difference between the sale price and the fair market value on the
exercise date, will be taxed as capital gain or loss. A capital gain or loss
will be long-term if the holding period of the shares is more than 12 months.
We
generally should be entitled to a deduction equal to the amount of ordinary
income recognized by the optionee as a result of the exercise of a nonstatutory
stock option or stock appreciation right, except to the extent such deduction
is
limited by applicable provisions of the Code or the regulations thereunder.
No
tax deduction is available to us with respect to the grant of a nonstatutory
stock option or stock appreciation right or the sale of the stock acquired
pursuant to such grant.
Restricted
Stock
.
A
participant acquiring restricted stock generally will recognize ordinary income
equal to the fair market value of the shares on the “determination date.” The
“determination date” is the date on which the participant acquires the shares
unless the shares are subject to a substantial risk of forfeiture and are not
transferable, in which case the determination date is the earlier of (i) the
date on which the shares become transferable or (ii) the date on which the
shares are no longer subject to a substantial risk of forfeiture. If the
determination date is after the date on which the participant acquires the
shares, the participant may elect, pursuant to Section 83(b) of the Code, to
have the date of acquisition be the determination date by filing an election
with the Internal Revenue Service no later than 30 days after the date on which
the shares are acquired. If the participant is an employee, such ordinary income
generally is subject to withholding of income and employment taxes. Upon the
sale of shares acquired pursuant to a restricted stock award, any gain or loss,
based on the difference between the sale price and the fair market value on
the
determination date, will be taxed as capital gain or loss. We generally should
be entitled to a deduction equal to the amount of ordinary income recognized
by
the participant on the determination date, except to the extent such deduction
is limited by applicable provisions of the Code.
Performance
and Restricted Stock Unit Awards
.
A
participant generally will recognize no income upon the receipt of a performance
share, performance unit or restricted stock unit award. Upon the settlement
of
such awards, participants normally will recognize ordinary income in the year
of
receipt in an amount equal to the cash received and the fair market value of
any
substantially vested shares received. If the participant is an employee, such
ordinary income generally is subject to withholding of income and employment
taxes. If the participant receives shares of restricted stock, the participant
generally will be taxed in the same manner as described above (see discussion
under “Restricted Stock”). Upon the sale of any shares received, any gain or
loss, based on the difference between the sale price and the fair market value
on the “determination date” (as defined above under “Restricted Stock”), will be
taxed as capital gain or loss. We generally should be entitled to a deduction
equal to the amount of ordinary income recognized by the participant on the
determination date, except to the extent such deduction is limited by applicable
provisions of the Code.
Deferred
Compensation Awards
.
A
participant generally will recognize no income upon the receipt of deferred
compensation awards. Upon the settlement of the awards, the participant normally
will recognize ordinary income in the year of settlement in an amount equal
to
the fair market value of the shares received. Upon the sale of any shares
received, any gain or loss, based on the difference between the sale price
and
the fair market value of the shares on the date they are transferred to the
participant, will be taxed as capital gain or loss. We generally should be
entitled to a deduction equal to the amount of ordinary income recognized by
the
participant, except to the extent such deduction is limited by applicable
provisions of the Internal Revenue Code.
Potential
Limitation on Company Deductions.
Code
Section 162(m) denies us a deduction to the Company for compensation paid to
certain employees in a taxable year to the extent that compensation exceeds
$1
million for a covered employee. It is possible that compensation attributable
to
stock options, when combined with all other types of compensation a covered
employee receives from us, may cause this limitation to be exceeded in any
particular year. Certain kinds of compensation, including qualified
“performance-based compensation,” are disregarded for purposes of the deduction
limitation. In accordance with applicable regulations issued under Section
162(m), compensation attributable to stock options and stock appreciation rights
will qualify as performance-based compensation, provided that: (i) the
option plan contains a per-employee limitation on the number of shares for
which
options or stock appreciation rights may be granted during a specified period,
(ii) the per-employee limitation is approved by the stockholders,
(iii) the option is granted by a compensation committee comprised solely of
“outside directors” (as defined in Section 162(m)) and (iv) the exercise
price of the option or right is no less than the fair market value of the stock
on the date of grant.
For
the
aforementioned reasons, the plan provides for an annual per employee limitation
as required under Section 162(m). Accordingly, options or stock appreciation
rights granted by the compensation committee should be able to qualify as
performance-based compensation, and the other awards subject to performance
goals may qualify.
Other
Tax Consequences.
The
foregoing discussion is intended to be a general summary only of the federal
income tax aspects of awards granted under the stock plan; tax consequences
may
vary depending on the particular circumstances at hand. In addition,
administrative and judicial interpretations of the application of the federal
income tax laws are subject to change. Furthermore, no information is given
with
respect to state or local taxes that may be applicable. Participants in the
stock plan who are residents of or are employed in a country other than the
United States may be subject to taxation in accordance with the tax laws of
that
particular country in addition to or in lieu of United States federal income
taxes.
INFORMATION
ABOUT THE HOLLYSYS OPERATING COMPANIES
Background
HollySys
Holdings (through its Chinese operating companies, which are collectively
referred to as “HollySys”), is a leader in China's automation and controls
industry. It develops, designs, produces, installs and maintains automation
and
control equipment and systems for a broad array of industries. HollySys has
historically focused its efforts in the area of Distributed Control Systems
(networks of controllers, sensors, actuators and other devices that can be
programmed to control outputs based on input conditions and/or algorithms),
with
a primary concentration in power plant and chemical plant automation systems.
However, HollySys also has a significant market presence in the basic materials,
pharmaceutical and food and beverage processing industries.
Over
the
past five years, HollySys has devoted significant resources to research and
development and sales efforts for market segments it believes will have the
greatest growth and margin protection over the coming 10 years.
HollySys
is distinguished for its comprehensive capabilities in the domestic industrial
automation market, concentrating its focus on the development of the Chinese
market. HollySys sells its products and services to, or carries out engineering
projects for, national or multi-provincial companies with subsidiaries located
in different areas, covering 30 provinces in China. To date, HollySys has served
more than 1,700 industrial enterprise customers and undertaken over 3,000
projects.
Currently,
HollySys conducts its operations principally through two companies, Beijing
HollySys and Hangzhou HollySys. In addition, Beijing HollySys is the majority
owner of Beijing HollySys Haotong Science and Development Co., Ltd., which
is
also engaged in the automation industry, and Beijing HollySys owns less than
a
controlling interest in several other companies engaged in related activities
(the “HollySys Affiliates”). Beijing HollySys was founded in 1996 and has
headquarters in Beijing. Hangzhou HollySys was founded in 2003 and is located
in
Hangzhou. Through its strategy of delivering integrated service, software and
hardware and its close affiliations with leading technical and research
institutes in China, HollySys has achieved a leading position in the domestic
Chinese automation industry.
HollySys’
management believes that the quality of its systems is unsurpassed by local
Chinese competitors and is comparable to high-end foreign suppliers of
Distributed Control Systems. HollySys’ project history supports that view. For
example after three years of review and analysis, BASF has designated HollySys
as a potential qualified Distributed Control Systems vendor, a distinction
shared with large multinationals such as ABB and Emerson.
Market
Overview
Since
1960’s, the automation system industry has experienced a steady growth fueled by
continuous demand for automation products and services by both traditional
process industries and discrete industries in their effort to optimize
productivity and improve efficiency. According to ARC Advisory Group, the
worldwide Distributed Control Systems market, as measured by revenue, was
approximately $10.3 billion in 2004. Despite large regions of the world
experiencing little or no growth, ARC Advisory Group projects that the worldwide
Distributed Control Systems market will continue to grow at the average annual
rate of 6% through 2009.
The
chart
below shows the forecast of worldwide Distributed Control Systems market
size.
Source:
ARC Advisory Group
According
to ARC Advisory Group, the Distributed Control Systems market in China, as
measured by revenue, exceeded $780 million in 2005 and is growing at a
compounded annual growth rate of approximately 12% through 2010. ARC Advisory
Group projects that the Distributed Control Systems market, as measured by
revenue, will exceed $1400 million by 2010.
The
chart
below shows the forecast of Distributed Control Systems market size in
China.
Source:
ARC Advisory Group
ARC
Advisory Group also believes that, “China, in contrast to most other countries,
provides robust growth prospects for Distributed Control Systems suppliers.
With
new investments continuing to take place in its core process industry sector,
the market has excellent growth potential in both the near and long-term. Almost
a quarter of a billion people with their growing disposable income are
generating an exploding demand for a wide range of products. Domestic and global
manufacturers, lured by this opportunity, have created new, world-class
production facilities in almost all vertical industries. They are going beyond
the near term opportunity for obtaining low cost labor. They are pursuing the
best available control system technology and attaining a sustainable competitive
advantage.”
Currently,
the vast majority of the global automation market is still controlled by a
handful of multi-national companies, most of them with western roots. The
competition includes some very recognizable names: Honeywell (US); Siemens
(Germany); General Electric (US); ABB (Sweden); Rockwell (US); Westinghouse
(US); and Hitachi (Japan). The western roots of automation are not surprising,
as that is also where industrialization began and progressed the farthest during
the 19th and 20th centuries.
However,
a new focus of the automation market is China, where the tremendous growth
of
industrialization is by now a very familiar story. Manufacturing jobs in the
US
and other western economies over the past two decades have steadily decreased,
while China’s industrial base has expanded at the rate of 8.5% annually since
1991. China’s shift from a developing country to one of the world’s leading
producers of industrial equipment and consumer goods has created a substantial
and growing demand for the automation systems that help to make those
manufacturing processes more efficient, reliable and safe.
Due
to
the rapid increase of investment in fixed assets in China, the Distributed
Control Systems market experienced extremely high growth. In 2004, the products
and services related to Distributed Control Systems market achieved RMB5.2
billion, increasing 26% compared with that of 2003. China Industrial Control
Network (CICN) believes that the Distributed Control Systems market will
increase about 20%, to approximately RMB6.2 billion in 2005. According to a
recent market survey by CICN, the Distributed Control Systems market in 2004,
the largest segment of industrial automation market in China, is dominated
by a
few key companies, including ABB, Honeywell, Shanghai Xinhua, Emerson, Yokogawa,
Foxboro, Supercon, and Siemens. In terms of market share, HollySys ranks as
the
second largest supplier in China’s Distributed Control Systems market and has
established a leadership position in some key segments. The growth in HollySys’
revenues has outpaced the growth of the automation market in
general.
Strategy
HollySys’
goal is to become one of the world's leading automation and process system
companies in the near future by expanding upon the strength that has made
HollySys the leading domestic automation system provider in China. The principal
elements of its core business strategies are so follows:
Maintaining
the leadership position in China’s Distributed Control Systems
Market
.
HollySys seeks to maintain and further strengthen its position in China as
the
leading provider of Distributed Control Systems system-platform for clients
in
various industries. Since the majority of HollySys’ customers operate in a wide
range of process industries, it stands to be a prime beneficiary from the growth
of China's economy in these industries. The demand for Distributed Control
Systems technology is significant in China and is rapidly growing as more and
more small and medium-size enterprises seek technical upgrades that would
sustain their competitiveness after China’s entry into the World Trade
Organization (WTO). HollySys plans to aggressively expand its business to fully
exploit the anticipated growing demand of Distributed Control Systems products
by the small and medium-size enterprises. HollySys’ combination of its patented
technologies, close ties with clients, and a comprehensive understanding of
the
Chinese market should allow it to capitalize on these growth
opportunities.
Enhancing
the leadership position in technology
.
HollySys has long been recognized as a pioneer in the development of Distributed
Control Systems technology as well as applications. It is continuously seeking
ways to improve its existing product lines while being committed to the
development of new applications. In order to maintain its leadership position
in
technology, HollySys has devoted significant resources to the research and
development process that is undertaken by a group of highly trained and skilled
engineers. HollySys plans to concentrate its research and development resources
on its core technologies including I/O (Input/Output) signal processing
technology, network protocol interface, Distributed Control Systems platform,
software development and application system design, that would further sharpen
HollySys’ technological edge compared with its competitors.
Leveraging
on a large customer base to offer total solutions
.
HollySys provides services offering total solutions, including systems
integration and customization of its proprietary technologies. The total
solutions approach is favored by Chinese customers and allows HollySys to build
and maintain close and long-term relationships with its customers. Along with
the maturity of its clients’ businesses and their increasing demand for
technical upgrades, HollySys expects that two-thirds of the current clients
would have the potential needs for the Manufacturing Execution System (MES)
and
system integrated solutions, which can be seamlessly integrated into Distributed
Control Systems platform.
Focusing
on high-value tailored technology services
.
HollySys plans to capitalize on its strength in the provision of
customer-tailored services for customers, ranging from system design to
application, all supported by a team of industrial experts. The
customer-tailored services should enable it to achieve a high profit margin
while increasing its bidding power. In addition, HollySys also plans to recruit
more highly qualified industry experts in the future to bring value to HollySys
and its customers.
In
addition of aiming for a global leadership position, a secondary goal of
HollySys is to carefully expand or migrate to the adjacent markets that can
share or strengthen the core business. HollySys believes that these areas of
expansion have four distinctive characteristics:
|
·
|
the
businesses are of significant size to support potential significant
sales
levels;
|
|
·
|
the
businesses are built on or strongly related to HollySys business,
so that
the adjacent market draws from the strength of the core and at the
same
time may serve to reinforce the
core;
|
|
·
|
there
are high barriers to entry, at the inception or discontinuity stage,
so
that HollySys can influence or even get deeply involved in the standard
setting process;
|
|
·
|
the
markets of the businesses have high barriers to entry, either through
technology or by economic scale, so as to generate high profit
margins.
|
Through
June 2005, HollySys had successfully expanded to the following adjacent
markets:
•
Migrate
the Distributed Control Systems platform to the SCADA (Supervision Control
and
Data Acquisition) system for Metro Transit systems and set up the de facto
standard for the industry.
•
Development
of the Safety System platform based on its core technologies which can be
utilized to develop the ESD (Emergency Shut Down) system for large chemical
processes or the protection system of turbine generators of power plants. The
profit margin of these systems will be several times higher than the
conventional Distributed Control Systems.
•
Transplant
the safety system platform to the signal systems for the main railway transport
control systems. The successful transplant of the triple redundancy and the
quadruple redundancy system platform to the railway signal interlocking, the
automatic train protection system, and the CTC (Central Train Control) systems
will help HollySys to obtain a leading position over time.
•
Application
of the SCADA (Supervision Control and Data Acquisition) platform and concept
to
the information management systems for e-government.
•
Development
of PLC (Programmable Logic Controller) systems based the core
technologies.
Products
and Services
As
a
leader in China's automation and controls industry, HollySys offers specialized
automation solutions (including management and control integrated solutions
for
process industries, automation solutions for subway and light-rail and railway
signaling automation solutions) based on each client’s specific requirements.
HollySys commits itself to provide reliable, advanced and cost-effective
solutions to help customers optimize their processes to achieve higher quality,
greater reliability and better productivity and profitability.
Providing
integrated automation solutions with value-added services, HollySys has procured
most of its contracts at a higher prices than its local competitors. HollySys’s
integrated solutions create value for and improve the competitive strengths
of
its customers in a number of ways:
·
Generate
synergy and improve efficiency of its customers through integrating
communications, marketing and service functions;
·
Utilize
its industry and process knowledge to develop customized solutions that improve
the efficiency of its customers;
·
Provide
a software platform (which cannot be sold separately) for the optimization
of management operations, which provides real-time automation and information
solutions throughout a business; and
·
Offer
maintenance and training services to its customers, which help to cut
costs and
improve operating efficiency.
HollySys
customizes the floor plans of the solutions based on careful on-site studies,
builds design-specific network systems using its advanced Distributed Control
Systems technology and proprietary software, and offers manufacturing execution
system services to ensure that real-time management control is available to
its
customers in a streamlined and easy-to-use manner.
Based
on
its careful research of the demand and requirements of manufacturing industries
for information technology, HollySys proposes management and control integrated
solutions. The solutions are based on the HOLLiAS (HollySys Integrated
Industrial Automation System) platform, which includes features of the fourth
generation of Distributed Control Systems and functions of the international
mainstream Distributed Control Systems. HOLLiAS is an open system software
platform that integrates various management functions and control systems with
procured peripheral equipment, self-produced core hardware and the customer’s
existing hardware and software. Using the HOLLiAS platform, HollySys can provide
customized solutions to meet the application requirements of different
industries.
HollySys
establishes a project group for each potential customer, which has a team of
systems engineers and managers engaged in providing total integrated solutions
to its customers to meet their specific requirements. Each project group is
staffed with a dedicated team of sales engineers, technical engineers and
project management professionals. The sales engineers and technical engineers
work together to offer the best customized solutions as a result of their
understanding of the customer’s detailed requirements through on-site studies.
The technical engineers are responsible for hardware assembly, software
configuration, testing and installation, commissioning and trial operation,
and
start-up and training; while the project management professionals oversee
budgetary matters, coordinate the work force, ensure adequacy of resources
and
monitor progress and quality to ensure the timely completion of each project.
HollySys’
integrated solutions projects involve one or more of the following
activities:
·
Solution
planning. HollySys provides its customers with strategic and tactical reviews
of
their current operations and future requirements. HollySys does much of this
work before the customer awards the contract to assist the customer in
developing an appropriate request for proposal and to improve HollySys’ chances
in winning the contract. The planning includes defining client business
requirements, developing appropriate hardware and software and selecting
preferred technology.
·
Solution
design. HollySys details the industry specifications and implementation tactics
necessary to achieve its customer’s objectives. HollySys also considers how the
new technology will integrate hardware and software integrated in the solution
with the customer existing hardware and software and how it will be managed
on
an ongoing basis. Examples of these services include defining functional
requirements for the system and its components, developing integration plans
and
designing of customer-specific system and services applications.
·
Solution
implementation. HollySys installs the recommended systems to meet its customers'
specific requirements. Key activities include project management, hardware
procurement and production, software development, configuration and field
installation and testing, and development of customized system and services
management applications.
·
Maintenance
and support services. HollySys also emphasizes creating value for its clients
by
providing high quality tailored services. HollySys’ professional, prompt and
long-term services include technical services, engineering services to specific
industries, application development services and maintenance services. HollySys
provides maintenance and technical support in connection with all its systems
integration projects. These services currently include assistance with the
implementation of new system platforms, configuration and programming services
for new business processes, and assistance with technology upgrading. HollySys
believes that its policy of on-going maintenance and technical support will
help
foster long-term relationships with its customers and eventually create
significant business opportunities.
·
Training.
HollySys also incorporates customer training and an ongoing service component
into its product offerings. HollySys provides technical training for its
customers and strategic partners to increase their awareness and knowledge
of
Distributed Control Systems technologies in the Chinese industrial automation
market and to support the operations of its customers' integrated automation
systems. The training helps to ensure that customers derive the greatest amount
of benefit possible from their new automation system. As a result, this training
leads to increased value, which in turn generates customer satisfaction and
loyalty.
HollySys
believes that its product design and applications that are integrated in the
solutions are unmatched among its domestic competitors. It also believes that
the sophistication and quality of its products rival those of the western-based
industry leaders, while its ability to understand and meet the needs of its
Chinese customers gives it a decided advantage over those western competitors.
The value of this combination is reflected in its strong revenue and profits
growth in recent years.
Research
and Development
As
a
high-technology company, HollySys’ business and long-term development rely
highly on its research and development capabilities. The research and
development process of HollySys is established based on Capability Maturity
Model Integration Level (CMMIL) 2&3 that can be classified into the
following seven phases:
•
Study
phase
•
Requirement
phase
•
Designing
phase
•
Implementation
phase
•
Testing
Phase
•
Inspection
Phase
•
Maintaining
phase
HollySys
uses standard project development life cycle models, including waterfall model,
increment model, iterative model and prototype. As a technology leader, HollySys
keeps developing and patenting new automation technologies every year. HollySys
continually reviews and evaluates technological changes affecting the automation
and integrated system industries and invests substantially in application-based
research and development. In addition to the research and development personnel,
HollySys also employs approximately 40 head engineers who are involved in the
design, manufacturing and quality control stages of the production process.
HollySys’ core technologies achieved from its research and development efforts
include:
•
Large
scale software platform architecture design;
•
Proprietary
network design and development technologies;
•
Safety
computer platform design and manufacturing;
•
Efficient
I/O (Input/Output) signal processing design technology; and
•
Embedded
system design and manufacturing
HollySys
is committed to incorporating the latest advances in electronics and information
system technology into its products and, whenever possible, developing
state-of-the-art proprietary products based on its extensive internal expertise
and research efforts. HollySys currently spends approximately 2-4% of annual
revenues on research and development. HollySys’ recent major research and
development focuses include:
•
Process
Control;
•
Nuclear
Power Automation System;
•
Transportation
Automation; and
•
Manufacturing
Automation.
HollySys’
research and development efforts have led to the invention of several
proprietary systems in the fields of Distributed Control Systems and
transportation automation systems. HollySys’ kernel technologies provide a
platform that is designed to enable the rapid and efficient development of
HollySys technologies for specific applications that are quickly, efficiently
and affordably tailored to particular industries and the needs of its individual
customers. Its software development tools enable HollySys to custom program
its
systems rapidly, allowing HollySys to apply digital technologies that take
advantage of the tremendous advances in electronics and information technology
to improve quality and reliability while reducing cost. The market for HollySys’
products includes not only the continuing large number of factories that are
under construction in China’s rapidly expanding industrial base, but also
extends to the replacement and upgrading of outdated legacy systems to bring
a
higher degree of control and efficiency to the automation of processes,
delivering increasing benefits to customers that must meet stiffening
competition.
Intellectual
Property Rights
HollySys
relies on a combination of copyright, patent, trademark and other intellectual
property laws, nondisclosure agreements and other protective measures to protect
its proprietary rights. HollySys also utilizes unpatented proprietary know-how
and trade secrets and employs various methods to protect its trade secrets
and
know-how. As of the end of June 2005, HollySys and its subsidiaries
hold eight software copyrights, 39 authorized patents, and nine patent
applications.
Although
HollySys employs a variety of intellectual property in the development and
manufacturing of products, HollySys believes that only a few of intellectual
property rights are individually critical to its current operations. However,
taken as a whole, HollySys believes intellectual property rights are significant
and that the loss of all or a substantial portion of such rights could have
a
material adverse effect on its results of operations. From time to time,
HollySys may desire or be required to renew or to obtain licenses from others
in
order to further develop and manufacture commercially viable products
effectively.
HollySys
markets its Distributed Control Systems products mainly under the brand name
of
“HOLLiAS”. The brand name has been well-established over the years and is
recognized by industry participants as well as the customers to be associated
with high quality and reliable products. HollySys has obtained trademark
protection for the brand name “HOLLiAS” in the PRC. In addition, HollySys and
its subsidiaries have also registered or applied for a series of trademarks
including brand names for both HollySys and its products.
Marketing,
Sales and Customer Support
HollySys
conducts its operations mainly through offices of Beijing HollySys and Hangzhou
HollySys. HollySys’ marketing and sales activities cover wide areas of China
that supply the vast majority of the demand for automation and control products,
systems and services.
Since
the
HollySys market strategy is to tailor its products to the specific needs of
its
customers, its sales force includes numerous engineers from a variety of
disciplines. The collective expertise of this sales staff of qualified
professionals gives HollySys an additional advantage relative to its domestic
competitors.
Most
products of HollySys are used at the system level and it has adopted a
centralized sales process, i.e. direct selling by the headquarters personnel.
HollySys also markets and sells its services and products primarily through
its
direct sales force. The direct sales force is organized into three groups,
as
follows:
·
Department
of Region Sales: there are 8 geographic sales regions covering 30 provinces
in
China. The direct sales professionals provide business consulting, promote
pre-sale activity and contact the customer.
·
Department
of Customer Service is in charge of managing relations with all contracted
customers, and improving customer satisfaction by coordinating responses to
the
client’s information request, sale of supplemental parts or components and
customer visits.
·
Department
of Marketing Plan has been established to facilitate strategic cooperation
with
certain specialized manufacturers, in order to expand the specific fields,
such
as Digital Electro-Hydraulic Control System (“DEH’), air separation and
desulphurization.
Currently,
the Programmable Logic Controller products are in the prophase of marketing
extension and HollySys is engaging three agencies and developing more agencies
for the Programmable Logic Controller.
HollySys
identifies and targets market segments and selects target sales opportunities
on
a national level, and it also conducts sales opportunity studies to ensure
that
adequate regional sales resources are available. Sales quotas are assigned
to
all sales personnel according to annual sales plans. HollySys classifies market
segments and target opportunities on national and regional levels. This
classification helps it to determine its primary sales targets and to prepare
monthly and quarterly sales forecasts. Then, the sales team approves target
projects, develops detailed sales promotion strategies and prepares reports
on
order forecasts, technical evaluation, sales budgeting expense, schedules and
competition analysis. After the report has been approved, a sales team is
appointed consisting of sales personnel and technicians.
HollySys’
market strategy focuses on building strategic cooperative relationship with
its
customers, educating them about technological developments and reflecting their
interests in its services and products. Up to now, its marketing and sales
efforts were combined. HollySys employs marketing personnel to conduct market
research, to analyze user requirements and to organize marketing communications.
The marketing team engages in a variety of marketing activities, including:
•
publishing
internal research reports and customer newsletters;
•
conducting
seminars and conferences;
•
conducting
ongoing public relations programs; and
•
creating
and placing advertisements.
HollySys
actively participates in technology-related conferences and demonstrates its
products at trade shows or at exhibitions targeted at its existing and potential
customers. Also, HollySys evaluates a range of joint-marketing strategies and
programs with its partners in order to take advantage of their strategic
relationships and resources.
As
of
June 30, 2005, HollySys employed 240 direct sales personnel who were assigned
to
three business areas: railway transportation, nuclear power plant, and
distributed control systems. Sales activities are coordinated at the
headquarters of Beijing HollySys and Hangzhou HollySys. All sales staff are
responsible for implementing the sales policies established at headquarters.
HollySys’
sales teams consist of a complementary group of sales personnel and hardware
and
software engineers. HollySys also makes certain that a member of the sales
team
possesses significant hands-on, industry-specific experience. This permits
the
team to do an on-site process analysis that comes from first hand knowledge
of
the processes being evaluated. This, in turn, makes the design and
implementation of upgrades simpler.
This
relatively intense effort at the sales stage promotes the success of HollySys
in
a number of ways, such as the ability to design the system that best meets
the
needs of the customer and delivering a custom solution instead of an
off-the-shelf amalgamation of hardware. By Employing a pool of skilled personnel
at this early stage, accelerators the design and the subsequent production
of a
particular customized solution, typically exceeding that of HollySys’
competitors. The result is a system that is more effective, efficient and
reliable, which in turn leads to a truly satisfied customer.
HollySys
has strong industry problem solving capability with a reputation for punctual
service and quick response to customers’ problems. HollySys also supports its
customers by offering field services such as maintenance and training services,
which help customers to cut cost and improve operating efficiency.
As
noted
earlier, HollySys is able to apply a large amount of engineering resources
to
this and other phases of its businesses because engineering talent in China
costs only about 10% to 15% of what it costs in the U.S. and Western Europe.
Manufacturing
HollySys
assembles its products from subcomponents provided by others or outsources
the
production to qualified vendors. HollySys acquires advanced printed circuit
board components from high quality suppliers. HollySys’ uses a team within its
manufacturing management department to coordinate procurement of raw materials
and outsourced processing, including procurement of components and standard
parts (such as cables and connectors), and outsourced processing of
PolyvinylChloride (PVC) coating, shells, and printed circuit boards. Products
must go through rigorous tests at HollySys before shipment.
HollySys
strictly follows ISO9001 standards during parts outsourcing and manufacturing,
system assembly and testing to warrant the quality of the whole system.
Competition
Having
proprietary systems and products offers a competitive advantage over domestic
Chinese competitors that lack the capabilities of HollySys. However, a number
of
large multinational companies with extensive resources have been offering first
rate automation systems to Chinese customers since before HollySys existed.
Differentiation from its multinational competitors on the basis of product
quality is not alone sufficient to give HollySys an advantage over those
competitors in the Chinese market. Compared to its competitors, HollySys’
competitive advantages include following elements:
•
A
large,
low cost engineering staff that permits HollySys to provide a custom solution
to
its customers at a lower price and quicker delivery than western companies
can
supply an off-the-shelf system;
•
Providing
a one stop solution for customers consisting of a fully integrated system that
includes Enterprise Resource Planning, Manufacturing Execution Systems,
Distributed Control Systems, Programmable Logic Controls and other dedicated
automation equipment;
•
Development
of kernel technologies that provide a platform for rapid and efficient
adaptation of basic modules to the specific needs of a given customer, which
renders the resulting product both more useful and affordable;
•
Utilization
of engineering professionals in the sales process to help match system
capabilities to customer needs and provide the assurance that HollySys can
meet
those needs;
•
An
in-depth understanding of local Chinese business capabilities, needs and
practices that enables HollySys to design a custom fit for the size, type and
level of sophistication of the customer;
•
Use
of an
open architecture in its systems that enables HollySys to integrate them with
legacy systems developed by other providers;
•
Offering
ongoing services, which not only create the opportunity to generate additional
revenue, but enable HollySys to troubleshoot installations effectively, help
to
ensure that maximum benefit is derived from the system, and gives HollySys
the
ability to identify the need for new products and services that will benefit
the
customer and generate additional business for HollySys.
Emphasis
on Engineering
.
Engineers are a critical element of effective design of both hardware and
software components of automation equipment and systems. For western companies,
they are also a very costly element of the process. Even the largest western
companies face constraints in the size of their engineering staffs due to the
high salaries and attendant costs.
One
of
the HollySys’ competitive advantages has been the low cost of engineers in China
relative to those in the west to increase the sophistication of its products
and
to accelerate their development. Applying high levels of engineering effort
to
each product enables HollySys to provide a solution that is tailored not only
to
the industry in which the customer operates, but also to the customer’s specific
needs. That custom solution is provided at a cost that is typically lower than
the generic products of its competitors.
Industry
Process Knowledge
.
HollySys devotes substantial time and effort to understanding the customer’s
processes. That knowledge of the customers’ businesses helps the engineers to
ensure that the systems they design will provide the optimum in benefits for
the
customers. HollySys maintains this information in an extensive “library” of
industry process information that it utilizes to speed up the system design
process and to maximize the quality of the result, while at the same time
minimizing costs.
As
a
result, HollySys is able to take into account the widely varying degree of
sophistication and resources that its Chinese customers possess. The result
of
this strategy is to broaden its potential customer base and to deliver
consistently products that are of value to these customers.
Integration
Services
.
Western
automation system companies are principally system platform suppliers. The
role
of integrating the systems into the customer’s overall management information
system is generally left to independent firms, which are widespread in western
countries.
China
does not have a large number of systems integration companies to perform this
work, as the profitability of these companies has historically been very low.
HollySys has bridged that gap by providing a vertically integrated solution
to
its customers that includes integration of the HollySys hardware into the
customers’ overall manufacturing and information systems. This combination of
the two aspects of system design and installation take further advantage of
the
low cost of engineering services in China and provides another benefit, as
the
design and integration teams can work together to produce the best result more
quickly and efficiently, again lowering costs.
Kernel
Technologies
.
Although HollySys delivers tailored systems, its systems are based on basic
modules of automation technology that are common across a broad array of
industries and applications. Using these modules as a starting point,
development of an industry and customer-specific product is both more efficient
and produces a better result than starting from scratch each time. That means
that HollySys, with its labor cost advantages, can provide a highly customized
automation product at a very favorable cost.
Use
of Engineering Sales Personnel
.
The use
of trained engineers in product and system design is complemented by the use
of
engineers in the sales process as well. The advantages of doing so are
substantial. They include the ability to understand from the beginning the
needs
of the customer and how to address them and the ability to convey that
information to the team that will ultimately develop the system to be installed.
Accounting
for the Broad Array of Chinese Customers’ Capabilities
.
China’s
rapid growth and industrialization distinguish it from other manufacturing
nations in some ways. There are many “established” Chinese companies that
operate in facilities that are decades old, many companies that operate in
new
or recently upgraded facilities, and the largest number that fall somewhere
in
between.
HollySys,
to a greater extent than its western competitors, understands the full range
of
needs and capabilities that its Chinese customers possess, and it has designed
its business to meet them. As a result, it is able to offer even the most basic
control systems solution while also providing the most sophisticated systems
available to applications that meet the rigorous requirement of the highly
complex and demanding nuclear power industry.
The
Role of Post-Installation Maintenance Services
.
Automation systems require regular maintenance to operate within the tight
tolerances needed to meet customer requirements. Older, analog systems were
well
within the capability of many customers to maintain on their own. However,
as
automation systems shifted to electronic components utilizing custom software
and working off of digital signals, their complexity increased and the ability
of customers to maintain their systems independently decreased. It is possible
for customers to hire specialized personnel with the knowledge to perform system
maintenance. However, it is not efficient for them to do so, as their
maintenance responsibilities would absorb only a portion of a work week.
HollySys
believes that it is unique among automation equipment manufacturers because
it
offers its customers maintenance services along with its products. HollySys’
regional sales and services offices place it within easy reach of a very high
proportion of its customer and potential customer base. That means it is
possible for a single maintenance technician to cover maintenance calls for
many
customers each week, making the service more cost-effective than having the
customer maintain the systems on its own.
The
advantages of offering this service lie not in the revenue that it generates
directly, but in the benefits derived from the strengthened relationship with
customers. Those benefits include: more effective maintenance and system
operation, which leads to increased customer satisfaction; better customer
relationships, which improve customer loyalty; and the ability to identify
new
business opportunities for HollySys as the customer’s business evolves.
Another
way that HollySys keeps ahead of its competitors is by its pace of development.
HOLLiAS is the fourth generation of controller system developed by HollySys,
and
it took HollySys only a little more than a decade after its first operational
system to achieve this breakthrough. HollySys believes that its competitors
are
frequently hampered by institutional factors that slow the product development
process. As a result, their products cannot incorporate the latest advances
in
electronics.
Employees
HollySys
employs approximately 1000 people. HollySys has a large staff of engineering
and
technical personnel. Seven hundred of its employees possess an engineering
degree, and another 200 are highly skilled technicians. Together they comprise
approximately 90% of the total HollySys workforce, a concentration of
engineering and technical talent that HollySys does not believe is matched
by
any of its competitors. HollySys’ strong reputation allows it to attract and
retain the engineering talent it needs to execute its business strategy. As
the
prevailing wage for engineers in China is considerably less than the equivalent
rates in Western economies, HollySys sees this as a significant competitive
advantage.
Properties
HollySys’
principal sales and marketing offices, marketing and development facilities,
manufacturing facilities and administrative offices are currently located on
two
premises comprising approximately 4,000 square meters and 25,000 square meters,
respectively, in Beijing and Hangzhou, China. These manufacturing facilities
are
used for system integration production, including hardware testing instruments,
auxiliary material processing, packaging and shipping, and for self-made product
integration production, including inspection and testing. HollySys believes
that
its current facilities are adequate for its current needs.
Legal
Proceedings
HollySys
is not involved in any legal proceedings which are expected to have a
significant effect on its business, financial position, results of operations
or
liquidity, nor is Chardan aware of any proceedings that are pending or
threatened which may have a significant effect on its business, financial
position, and results of operations or liquidity.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BUSINESS
OVERVIEW
Gifted
Time Holdings Limited (the “Company” or “HollySys Holdings”) is a holding
company that owns a 74.11% equity interest in Beijing HollySys Co., Ltd.
(“Beijing HollySys”) and a 60% direct ownership interest in Hangzhou HollySys
Automation Co., Ltd. (“Hangzhou HollySys,” and, together with Beijing HollySys
and its subsidiary, the “Operating Companies”). In
addition, the Company owns another a 29.64% of Hangzhou HollySys
by virtue of the fact that Beijing HollySys owns 40% of Hangzhou
HollySys.
Beijing
HollySys was established in September 1996 as a domestic Chinese company based
in Beijing China. From inception, it has been engaged in designing, developing
and manufacturing automation control systems for customers throughout China.
It
offers integrated automation solutions for many industries, including electric
power generation, transmission and distribution, manufacturing (including
metallurgy, construction materials, petrochemical and pharmaceutical
industries), and railroad transportation. Beijing HollySys’ integrated
automation systems and solutions have enabled customers to improve the safety,
reliability and efficiency of their manufacturing processes and significantly
enhance the customers’ overall profitability.
Hangzhou
HollySys was established as an equity joint venture under Chinese laws in
September 2003. Beijing HollySys owns 40% of Hangzhou HollySys, and the Company
owns the remaining 60%. The operations of Hangzhou HollySys emphasize industrial
automation and integrated solutions.
In
addition to its ownership interest in Hangzhou HollySys, Beijing HollySys has
an
ownership interest in several other companies that are engaged in various
aspects of the automation industry. As of December 31, 2005, these ownership
interests were in the following companies:
|
·
|
Shenzhen
HollySys Automation Engineering Co., Ltd. (“Shenzhen HollySys”)
(52%);
|
|
·
|
New
Huake Electronic Technology Co., Ltd.
(37.5%);
|
|
·
|
Beijing
Haotong Science and Technology Development Co., Ltd. (“Haotong”)
(70%);
|
|
·
|
HollySys
Information Technology Co., Ltd.
(40%);
|
|
·
|
HollySys
Zhonghao Automation Engineering Technology Co., Ltd. (“HollySys Zhonghao”)
(89.11%);
|
|
·
|
HollySys
Electric Technology Co., Ltd.
(40%);
|
|
·
|
Beijing
TechEnergy Co., Ltd. (50%); and
|
|
·
|
Beijing
HollySys Equipment Technology Co., Ltd.
(20%).
|
Only
Haotong is considered a subsidiary for purposes of consolidating financial
results, based on the fact that the ownership interest is greater than 50%.
Although the ownership interest in HollySys Zhonghao is also greater than 50%,
this company ceased operations in 2003, and for that reason it is treated as
an
affiliate rather than as a subsidiary. Beijing HollySys expects that HollySys
Zhonghao will be dissolved in the near future. Shenzhen HollySys is also treated
as an affiliate, as it ceased its operating activities in 2002 and Beijing
HollySys has provided for full impairment of the assets. Shenzen HollySys is
expected to be dissolved in the near future.
The
Operating Companies’ automation products and systems control continuous and
batch industrial processes applicable to a wide range of industries, such as
electric power generation, transmission and distribution, construction
materials, petrochemicals, metallurgy and pharmaceutical manufacturing. While
integrated solutions for industrial automation customers are currently the
core
business of the Operating Companies, they have also pursued a strategy to
penetrate two industry sectors with high value and high growth potential: rail
transportation and nuclear power plant automation systems.
Rail
transportation automation systems include both system integration and signal
automation. The former involves providing automation systems and solutions
for
metropolitan rail and subway transportation systems that are under construction,
while the latter involves managing traffic on regional and national rail
systems.
The
Operating Companies have only recently moved into the nuclear power plant
control systems sector. Nuclear power is expected to grow significantly in
China
in the next decade and beyond. As the sole qualified domestic provider of
automated control systems for the nuclear power generating industry, Beijing
HollySys is well-positioned to benefit significantly from the anticipated
increase in this business sector. Although revenue from this industry is
currently a small portion of the overall revenues of the Operating Companies,
management expects that the increase in demand for automated control systems
in
this sector will lead to its being a significant source of revenues in the
next
three to five years and beyond.
The
Operating Companies are recognized as pioneers in the development of Distributed
Control System (“DCS”) technology and applications in China. They have completed
over 3,000 projects for more than 1,700 customers throughout China, placing
them
among the leaders in the marketplace. To maintain their market leadership,
the
Operating Companies devote significant resources to research and development.
Their R&D team consists of more than 150 engineers based in Beijing. In
addition, the Operating Companies employ more than 40 lead engineers in the
design and manufacturing processes to assure the quality of their products.
Research and development work is market-oriented, so that the products developed
are designed to both serve a market of sufficient size to justify the
development effort and provide functionality that customers desire.
Beijing
HollySys has developed proprietary technologies in several key areas. As a
result, it is able to offer a series of highly advanced and practical, reliable
and economical products that are readily adaptable to a variety of applications.
Its software development is an integral part of its significant product
offerings, which include HOLLiAS (its fourth generation DCS platform), the
HOLLiAS-PLC programmable logic controller, and the MACS-SCADA control system,
which is used in the rail transportation sector.
The
Company relies on a combination of copyright, patent, trademark and other
intellectual property protection to safeguard their innovations. As of December
31, 2005, the Company has eight software copyrights, thirty-nine approved
patents and nine applied patents.
Over
the
years the Operating Companies have produced significant gains in their operating
results, primarily from increasing sales of integrated industrial automation
systems, which have led to consistent increases in revenues and net income.
The
Company achieved a net income of $8.99 million for the six months ended December
31, 2005 compared to $7.57 million for the same period of the prior year. The
Company generated net income of $13.70 million, $4.74 million and $2.23 million
for the fiscal years ended June 30, 2005, 2004 and 2003,
respectively.
Regarding
the consolidated total revenues, the Company achieved $49.43 million for the
six
months ended December 31, 2005, compared to $40.53 million for the same period
of the prior year. Total revenues grew 47.5% from $35.99 in fiscal 2003 to
$53.07 million in fiscal 2004, which was followed by growth of 49.9% to $79.57
million in fiscal 2005.
The
Company’s philosophy emphasizes operating a highly efficient and profitable
business enterprise that generates value for its customers, employees, and
shareholders.
CRITICAL
ACCOUNTING POLICIES
The
discussion and analysis of the Company’s financial condition presented in this
section are based upon the Company’s consolidated financial statements, which
have been prepared in accordance with the generally accepted accounting
principles in the United States. During the preparation of the consolidated
financial statements, the Company is required to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenue and expenses,
and related disclosure of contingent assets and liabilities. On an ongoing
basis, the Company evaluates its estimates and judgments, including those
related to sales, returns, pricing concessions, bad debts, inventories,
investments, fixed assets, intangible assets, income taxes and other
contingencies. The Company bases its estimates on historical experience and
on
various other assumptions that it believes are reasonable under current
conditions. Actual results may differ from these estimates under different
assumptions or conditions.
In
response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding
Disclosure about Critical Accounting Policy,” the Company has identified the
most critical accounting policies upon which its financial status depends.
It
determined that those critical accounting policies are related to the use of
estimates, inventory valuation, revenue recognition, income tax and impairment
of intangibles and other long-lived assets. These accounting policies are
discussed in the relevant sections in this management’s discussion and analysis,
including the Recently Issued Accounting Pronouncements discussed
below.
Revenue
recognition
Revenues,
primarily generated from designing, building, and delivering customized
integrated industrial automation systems and providing relevant solutions,
are
recognized over the contract term based on the percentage of completion method.
The contracts for designing, building, and delivering customized integrated
industrial automation systems are legally enforceable binding agreements between
the Operating Companies and customers. Performance of these contracts often
will
extend over long periods, and the right to receive payments depends on the
performance of the Operating Companies in accordance with these contractual
agreements. In accordance with AICPA’s SOP 81-1, “Accounting for Construction
Contracts and Certain Production-Type Contracts,” revenue recognition is based
on an estimate of the income earned to date, less income recognized in earlier
periods. Estimates of the degree of completion are based on the costs incurred
to date compared to the expected total costs for the contracts. Revisions in
estimated profits are made in the period in which the circumstances requiring
the revision become known. Provisions, if any, are made currently for
anticipated loss on the uncompleted contracts. Revenue in excess of billings
on
the contracts is recorded as unbilled receivables and included in accounts
receivable. Billings in excess of revenues recognized on the contracts are
recorded as deferred revenue until the above revenue recognition criteria are
met. Billings are rendered based on agreed milestones included in the contracts
with customers.
Revenue
generated from sales of automation products and electronic equipment are
recognized when persuasive evidence of an arrangement exists, delivery of the
products has occurred, customer acceptance has been obtained, which means the
significant risks and rewards of the ownership have been transferred to the
customer, the price is fixed or determinable and collectibility is reasonably
assured.
Accounts
receivable, other receivables and concentration of credit
risk
During
the normal course of business, the Operating Companies extend unsecured credit
to their customers, as they do not require collateral from customers for payment
of their obligations. The normal credit terms allow 90 to 120 days for payment.
The Operating Companies maintain cash accounts at credit worthy financial
institutions. They regularly evaluate and monitor the creditworthiness of each
customer on a case-by-case basis. At the end of each period, allowance for
doubtful accounts of billed accounts receivable is accrued using the age
analysis method. The Company includes any account balances that are determined
to be uncollectible in the allowance for doubtful accounts. After all attempts
to collect a receivable have failed, the receivable is written off against
the
allowance.
Other
receivables include deposits required to be submitted with bids on contracts.
Contract bidding service providers will deduct a portion of these deposits
as
service fee if the Operating Companies win a contract, and the balance is
returned to them after the bidding process ends. If they do not win a contract,
the full amount of the deposit is returned to them at the conclusion of the
bidding process. Other receivables also include shipping freight paid on behalf
of customers which was not included on invoices issued by the Operating
Companies for revenue recognition purposes. The Company assesses collection
possibilities on a regular basis and provides a corresponding allowance for
doubtful accounts.
Based
on
the information available to Company management, it believes that the allowance
for doubtful accounts as of June 30, 2003, 2004 and 2005 and December 31, 2005
was adequate.
Inventories
Inventories
are composed of raw materials and low value consumables, work-in-progress and
finished goods. Inventories are stated at the lower of cost or market based
on
the weighted average method. The work-in-progress represents the costs of
projects which have been initiated in accordance with specific contracts and
are
not yet complete.
The
Company makes provisions for estimated excess and obsolete inventory based
on
its regular reviews of inventory quantities on hand and the latest forecasts
of
product demand and production requirements from its customers. The Company
writes down inventories for not saleable, excess or obsolete raw materials,
work-in-process and finished goods by charging such write-downs to cost of
sales. In addition to write-downs based on newly introduced parts, statistics
and judgments are used for assessing a provision on the remaining inventory
based on salability and obsolescence.
Impairment
of long-lived assets
The
Company reviews long-lived assets for impairment when certain indicators are
present that suggest the carrying amount may not be recoverable. This review
process primarily focuses on other intangible assets from business acquisitions
and property, plant and equipment. Factors considered include the under
performance of a business compared to expectations and shortened useful lives
due to planned changes in the use of the assets. Recoverability is determined
by
comparing the carrying amount of long-lived assets to estimated future
undiscounted cash flows. If future undiscounted cash flows are less than the
carrying amount of the long-lived assets, an impairment charge would be
recognized for the excess of the carrying amount over fair value determined
by
either a quoted market price, if any, or a value determined by utilizing a
discounted cash flow technique. Additionally, in the case of assets that will
continue to be used in future periods, a shortened life may be utilized, if
appropriate, resulting in accelerated amortization or depreciation based upon
the expected net realizable value of the asset at the date the asset will no
longer be utilized by us. Actual results may vary from estimates due to, among
other things, differences in operating results, shorter asset useful lives
and
lower market values.
Income
taxes
The
Company recognizes deferred tax liabilities and assets for the future tax
consequence attributable to the difference between the tax bases of assets
and
liabilities and their reported amounts in the financial statements. Deferred
tax
assets and liabilities are measured using the enacted tax rate expected to
apply
to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of
a change in tax rates is recognized in income in the period that included the
enactment date.
The
Company assesses the likelihood that its deferred tax assets can be recovered.
If recovery is not likely, the provision for taxes must be increased by
recording a reserve in the form of a valuation allowance for the deferred tax
assets that are estimated not to be ultimately recoverable. In this process,
certain relevant criteria are evaluated, including the existence of deferred
tax
liabilities that will absorb deferred tax assets, the taxable income that can
be
used to absorb net operating losses and credit carry-backs, and taxable income
in future years. The Company’s judgment regarding future profitability may
change due to future market conditions, changes in tax laws and other factors.
These changes, if any, may require material adjustments to these deferred tax
assets and an accompanying reduction or increase in net income in the period
when such determinations are made. In addition to the risks described above,
the
effective tax rate is based on current enacted tax law. Significant changes
during the year in enacted tax law could affect these estimates.
RESULTS
OF OPERATIONS
Comparison
of Six Months Ended December 31, 2005 and 2004
Operating
revenues
The
Company’s operating revenues are derived from two separate categories. One is
integrated contracts, which involves the design, assembly and installation
of
control systems, which accounts for the large majority of its revenues. The
other is the sale of products.
For
the
six months ended December 31, 2005, total revenues amounted to $49.43 million,
an increase by $8.90 million compared to $40.53 million for the same period
of
the prior year, representing a 22.0% increase. The increase was mainly due
to
the increased integrated contract revenue during this period.
The
components of revenue shifted slightly, as the integrated systems revenue
decreased from 96.1% of total revenues for the same period the prior year to
94.9% for the six months ended December 31, 2005. Of the $49.43 million of
total
revenues, the integrated contract revenue accounted for $46.92 million, an
increase by $7.98 million compared to $38.94 million for the same period the
prior year, representing a 20.5% increase. The increase was primarily due to
a
greater number of integrated contracts being performed during the six months
ended December 31, 2005. There were 956 contracts being performed during that
period compared to 805 for the same period of the prior year, an 18.8% increase.
The
increase in demand came principally from metallurgy, power generation and
petrochemicals sectors. The Company’s expenditures in research and development
activities, especially those leading to the introduction of HOLLiAS, has helped
it maintain its market leadership and attract new customers. In addition, a
combination of copyright, patent, trademark and other intellectual property
protection has enabled the Company to safeguard its innovations. Those
innovations, together with other proprietary know-how and valuable industry
insight, enable the Company to maintain its competitive advantage. Another
significant factor in the Company’s continued growth has been a shift of much of
its industrial automation system work from Beijing HollySys to Hangzhou
HollySys, allowing Beijing HollySys to focus on the rail transportation sector,
increasing its effectiveness in that sector.
Of
the
$49.43 million of total revenues, approximately $2.52 million was related to
product revenue, an increase of approximately $918,000 over the $1.60 million
in
product revenue for the same period of the prior year, a 57.5% increase. The
growth was mainly due to the increased demand for the Company’s equipment during
this period.
Cost
of revenues
Cost
of
revenues can be divided into cost of integrated contracts and cost of products
sold, in line with the categories of revenues.
The
total
cost of revenues amounted to $33.43 million, an increase by $5.85 million
compared to $27.58 million for the same period of the prior year, a 21.2%
increase. The increase was consistent with the increase in total revenue. The
components of cost of revenues shifted somewhat, as the cost of integrated
contract revenue decreased from 99.3% of the total cost of revenues for the
2004
period to 95.6% for the six months ended December 31, 2005.
The
cost
of integrated contract revenue consists mainly of cost for designing, building
and delivering customized automation systems and providing solutions to
customers (including material, components, equipment purchased and internally
produced products, and labor and other manufacturing expenses). The total cost
of integrated contracts was $31.95 million, an increase by $4.55 million
compared to $27.40 million for the same period the prior year, representing
a
16.6% increase. This was consistent with the increased number of integrated
contracts being performed. As a percentage of cost of integrated contract
revenue, labor cost accounted for 5.5% compared to 6.5% in the same period
the
prior year, cost of equipment accounted for 73.7% compared to 71.2% in the
same
period the prior year, and other contract execution expenses accounted for
20.8%, which decreased slightly from 22.3% in the same period the prior year.
As
a percentage of integrated contract revenue, labor cost accounted for 4.5%
for
both periods, cost of equipment accounted for 46.6% compared to 47.8% in the
same period the prior year and other contract execution expenses accounted
for
14.2%, which slightly decreased from 15.9% in the same period the prior year.
Due to the combined impact of these changes in cost of integrated contract
revenue, gross margin for integrated contracts increased from 29.6% for the
six
months ended December 31, 2004 to 31.9% for the six months ended December 31,
2005.
Cost
of
products sold was $1.48 million, an increase of $1.30 million compared to
$182,000 for the same period of the prior year. The increase in cost of products
sold was due to the fact that in order to better satisfy customers’ needs, in
the current period the Company purchased a greater portion of products sold
from
outside vendors at higher prices relative to internally produced equipment;
whereas, during the six months ended December 31, 2004, it assembled a larger
portion of the products sold. Consequently, the gross margin for product sales
in the same period of the prior year was better.
Gross
margin
As
a
percentage of total revenues, the overall gross margin was 32.4% for the six
months ended December 31, 2005 compared to 32.0% for the same period in the
prior year.
The
gross
margin for integrated contracts was 31.9% for the six months ended December
31,
2005 compared to 29.6% for the same period of the prior year. With the increase
in revenue, the Company maintained the same or better gross margin. This was
a
result of adopting some new cost-saving measures, such as centralized
procurement with volume discounts and rebates, a more efficient deployment
of
its work force and improved project management capabilities.
The
Company intends to continue to strengthen its cost-saving measures. Moreover,
it
has established a new price quotation system with pricing guidelines that are
adaptable to the characteristics of diverse industries and regions to maximize
the prices it can obtain and improve its gross profit.
Operating
expenses
Selling
expenses
Selling
expenses mainly consist of compensation, traveling, and administrative expenses
related to marketing and sales promotion activities of the marketing and credit
departments. Selling expenses were approximately $3.38 million for the six
months ended December 31, 2005, an increase of 11.0%, or roughly $333,000,
compared to approximately $3.05 million for the same period of the prior year.
Of the total increase , $281,000 was related to payroll expense of sales
personnel, $144,000 was for bidding fees and $41,000 was for travel expense,
all
of which was offset by the decrease of $133,000 in office expenses, including
telephone and other utilities, and office supplies for the six months ended
December 31, 2005, compared to the same period of the prior year. However,
as a
percentage of total revenues, selling expenses accounted for 6.8% and 7.5%
for
the six months ended December 31, 2005 and 2004, respectively, a decreasing
trend. The Company has established guidelines to monitor and evaluate sales
performance in different industries and regions to control selling expenses.
General
and administrative expenses
General
and administrative expenses mainly include compensation, traveling and other
administrative expenses of non-sales-related departments, such as the planning
and financial department, information systems department and human resources
department.
General
and administrative expenses amounted to approximately $3.79 million for the
six
months ended December 31, 2005, an increase of roughly $995,000 compared to
approximately $2.79 million for the same period of the prior year, representing
an increase of 35.6%. The increase in general and administrative expenses was
primarily due to several factors. First, the efforts to become listed in a
stock
exchange outside China led to an increase of $451,000 in professional service
fees, such as fees charged by lawyers and auditors, during this period, while
there were no such expenses during the same period the prior year. Second,
an
increase in compensation paid to non-sales-related employees of $355,000
occurred. Third, office expenses (such as supplies, copying expenses, mailing
fees, and utilities) increased by $71,000. Fourth, the Company increased the
bad
debt provision by $48,000. Finally, an increase in depreciation expenses of
$70,000 was taken. As a result of the above increases, general and
administrative expense accounted for 8.5% and 6.9% of total revenues for the
six
months ended December 31, 2005 and 2004, respectively.
Research
and development expenses
Research
and development expenses comprise mostly compensation, materials consumed,
and
experiment expenses for specific new product research and development, and
any
expenses incurred for basic research on advanced technologies.
Research
and development expenses were presented on the statement of income as zero
for
both periods. This was due to the fact that subsidy income received from the
government increased to $3.61 million from $2.61 million for the six-month
periods ended December 31, 2005 and 2004, respectively. This subsidy income
was
offset against actual research and development expenses of $877,000 and $542,000
for the six-month periods ended December 31, 2005 and 2004
respectively.
Income
from operations
Income
from operations increased by approximately $1.71 million, or 24.1%, from $7.10
million for the six months ended December 31, 2004 to $8.82 million for the
six
months ended December 31, 2005, as a result of the following increases: $8.90
million in total revenues, $5.85 million in cost of revenues, $333,000 in
selling expenses and $995,000 in general and administrative expenses. As a
percentage of total revenue, the operating income for the six months ended
December 31, 2005 was 17.8% compared to 17.5% for the same period the prior
year. The increase as a percentage of total revenues was mainly due to a
decrease in cost of revenue due to implementation of various cost-cutting
measures, resulting in improved gross margins, from 32.0% to 32.4% for the
six
months ended December 31, 2004 and 2005, respectively.
Interest
expenses, net
For
the
six months ended December 31, 2005, net interest expenses increased by $383,000,
or 194.5%, from $197,000 for the same period of the prior year to $580,000.
The
increase in interest expenses was mainly due to the fact that the Company
received specified governmental subsidies of approximately $242,000 for the
purpose of offsetting interest expense for the period ending December 31, 2004
that it did not receive in the current period. In addition, the Company’s
outstanding bank loans in the six months ended December 31, 2005 were higher
than the outstanding bank loans during the same period of the prior year, which
increased interest expense from $481,000 to $660,000 for the six months ended
December 31, 2004 and 2005, respectively. Also, the Company received $79,000
of
interest income for the six months ended December 31, 2005, compared to just
$41,000 in the same period the prior year. As a percentage of total revenues,
the interest expense for the six months ended December 31, 2005 was 1.2%
compared to 1.1% for the same period of the prior year.
Other
income (expenses), net
Other
income (expense) consists primarily of miscellaneous income from providing
maintenance and training services to customers and the sales of materials for
industrial automation systems and any other non-operating items. For the six
months ended December 31, 2005, other net income (expenses) decreased by
$165,000, or 218.8%, from $76,000 for the same period of the prior year to
$90,000 (negative). The decrease was mainly due to the fact that Beijing
HollySys sold some technology to another subsidiary and thus incurred related
business taxes and urban construction and maintenance fees. Overall, the change
in other income (expense) was immaterial to the Company’s financial performance
for the six months ended December 31, 2005 compared with the same period for
fiscal 2004.
Subsidy
income
The
local
government in Beijing and Hangzhou provides financial subsidies out of the
value
added tax it collects to encourage the research and development efforts of
certain enterprises.
Beijing
HollySys,
Haotong and Hangzhou HollySys all receive such subsidies. All subsidies were
accounted for based on hard evidence that the operations of those companies
were
entitled to receive these subsidies or that cash had been received. Value added
tax refunds recognized for supporting research and development efforts were
first offset against research and development expenses, and the remaining
balance, if any, together with other subsidies, was recognized as subsidy income
in accordance with internationally prevailing practice.
Subsidy
income received from the government for the six months ended December 31, 2005
amounted to $3.61 million, compared to $2.61 million for the six months ended
December 31, 2004. Proceeds from subsidies used to offset actual research and
development expenses amounted to $877,000 and $542,000 for the six-month periods
ended December 31, 2005 and 2004, respectively. Also, approximately $242,000
of
financial subsidies from the government were used to offset interest expenses
incurred for the same period of the prior year. The remaining amounts of subsidy
income of $2.74 million and $1.82 million for the six-month periods ended
December 31, 2005 and 2004, respectively, were presented as a separate line
item
on the statement of income.
Income
tax provision
For
the
six months ended December 31, 2005, the Company’s income tax provision was
$249,000 for financial reporting purposes, whereas there was an income tax
provision of $170,000 for the same period of the prior year. This change was
due
mainly to the increase in taxable income of the Operating Companies. Beijing
HollySys had an income tax provision of approximately $224,000 for the six
months ended December 31, 2005 (as its taxable income increased) compared to
$152,000 for the same period of the prior fiscal year. Haotong had an income
tax
provision of approximately $25,000 (as its taxable income increased) for the
six
months ended December 31, 2005 compared to $18,000 for the same period of the
prior fiscal year. Hangzhou HollySys had income of approximjately $9.09 million
before income tax for the six months ended December 31, 2005 compared to $5.55
million for the same period of the prior fiscal year. Hangzhou HollySys was
exempt from income taxes for both six-month periods.
Minority
interest
The
minority interest for the six months ended December 31, 2005 was approximately
$2.18 million, an increase by $552,000 compared to $1.63 million for the same
period of the prior year. The minority interest percentage in Beijing HollySys,
Hangzhou HollySys and Haotong did not change for the six months ended December
31, 2005. However, the increase in minority interest was mainly attributable
to
the fact that the net income in Hangzhou HollySys, where the minority interest
is larger, increased from approximately $5.55 million for the six months ended
December 31, 2004 to approximately $9.11 million in the same period of fiscal
2006, which led to the increase of approximately $369,000 in minority interests.
The remaining increase was attributable to the increase in net income of Beijing
HollySys and Haotong, which led to the increase in minority interests by
$145,000 and $38,000, respectively, for the six months ended December 31, 2005
compared with the same period in 2004.
Net
income
For
the
six months ended December 31, 2005, the Company’s net income amounted to $8.99
million after deducting the portion attributed to the minority interest, an
increase by $1.42 million compared to $7.57 million for the same period of
the
prior year, or 18.8%. This increase was attributable primarily to the increase
in revenues, gross margin and government subsidies.
Comparison
of Fiscal Years Ended June 30, 2005 and 2004
Operating
revenues
For
the
fiscal year ended June 30, 2005, the Company’s total revenues amounted to $79.57
million, representing an increase of $26.50 million, or 49.9%, over revenues
of
$53.07 million for fiscal 2004. The increase was attributed to the increase
in
integrated contact revenue by $23.8 million. The components of revenue changed
slightly, with integrated contract revenue decreasing from 96.5% of total
revenues in fiscal 2004 to 94.3% in fiscal 2005. The relative change between
the
components of operating revenues was due to the fact that the sales of products
increased at a faster rate than integrated contract revenue during the 2005
fiscal year.
Of
the
$79.57 million of total revenues for fiscal 2005, integrated contract revenue
accounted for $75.03 million, an increase of $23.80 million compared to $51.22
million for the prior year, a 46.5% increase. The increase was primarily due
to
a greater number of integrated contracts being performed during fiscal 2005.
During 2005, the Operating Companies performed on 1,514 contracts compared
to
967 in the prior year. The increase in demand came principally from metallurgy,
power generation and petrochemicals sectors. The Company’s investment in
research and development activities, especially those leading to the
introduction of HOLLiAS, has helped it maintain its market leadership and
attract new customers. In addition, a combination of copyright, patent,
trademark and other intellectual property protection has enabled the Company
to
safeguard its innovations. Those innovations, together with other proprietary
know-how and valuable industry insight, enable it to maintain its competitive
advantage. Another significant factor in the Company’s continued growth has been
a shift of much of its industrial automation system work from Beijing HollySys
to Hangzhou HollySys, allowing Beijing HollySys to focus on the rail
transportation sector, increasing its effectiveness in that sector.
Of
the
$79.57 million of total revenues, approximately $4.55 million was derived from
product sales, an increase of approximately $2.70 million compared to $1.85
million in the prior year, a 145.7% increase. The growth was mainly due to
the
increased demand from customers for the Company’s equipment in fiscal
2005.
Cost
of revenues
The
total
cost of revenues amounted to $54.68 million, an increase of $16.78 million
compared to $37.91 million in the prior year, a 44.3% increase. The increase
was
due mainly to the increase in cost of integrated contract revenue. The
components of cost of revenues changed as cost of integrated contract revenue
decreased from 99.1% of total cost of revenues in fiscal 2004 to 95.4% in fiscal
2005.
The
total
cost of integrated contracts was $52.16 million, an increase of $14.59 million
compared to $37.57 million in the prior year, a 38.9% increase. This growth
in
cost of revenues was in line with the overall increase in revenues generated
by
integrated contracts. As a percentage of cost of integrated contract revenue,
labor cost accounted for 6.4% compared to 6.6% for the prior year, cost of
equipment accounted for 70.3% compared to 70.4% for the prior year and other
contract execution expenses accounted for 23.3% which slightly increased from
23.0% for the prior year. As a percentage of integrated contract revenue, labor
cost accounted for 4.5% compared to 5.2% for the prior year, cost of equipment
accounted for 46.6% compared to 48.2% for the prior year and other contract
execution expenses accounted for 16.0% which decreased from 18.0% for the prior
year. Due to the combined impact of these changes in cost of integrated contract
revenue, gross margin for integrated contracts increased from 26.7% in fiscal
2004 to 30.5% in fiscal 2005.
For
fiscal 2005, cost of products sold was $2.52 million, an increase of $2.18
million compared to $338,000 in the prior year, representing a 644.8% increase.
The increase in cost of products sold was due to the fact that the Company
purchased and resold a much larger share of those products from outside vendors
in fiscal 2005 compared with fiscal 2004, when it made many of those components
internally. As a result, margins on those product sales in fiscal 2005 were
significantly smaller.
Gross
margin
As
a
percentage of total revenues, the overall gross margin was 31.3% for the fiscal
year ended June 30, 2005, compared with 28.6% in the prior year.
The
gross
margin for integrated contract was 30.5% for fiscal 2005 compared to 26.7%
for
fiscal 2004. The improvement in margins is attributed to the increase in
contract pricing, the adoption of various cost-saving measures, such as
centralized procurement with volume discounts and rebates, a more efficient
deployment of the work force and improved project management
capabilities.
Operating
expenses
Selling
expenses
Selling
expenses were $5.65 million for fiscal 2005, an increase of 24.9% or $1.12
million compared to $4.52 million for fiscal 2004. Of the increase of $1.12
million, $396,000 was related to payroll and employment benefits for sales
personnel, $231,000 was for traveling expenses, $195,000 for office supplies
and
utilities, $117,000 was for entertainment expenses, $84,000 was for
advertisement expenses, $71,000 was for bidding fees, $16,000 was for office
leasing and $14,000 was for depreciation of fixed assets in fiscal year 2005,
compared to the same categories of expenses for the prior year. However, as
a
percentage of total revenues, the selling expense accounted for 7.1% and 8.5%
for the fiscal years ended June 30, 2005 and 2004, respectively. The Company
has
established guidelines to monitor and evaluate sales performance in different
industries and regions to control selling expenses. The decrease in selling
expenses as a percentage of total revenues meant that its selling efficiency
had
improved compared to the prior year.
General
and administrative expenses
General
and administrative expenses amounted to $5.14 million for fiscal 2005, an
increase of $2.46 million compared to $2.68 million for fiscal 2004, an increase
of 91.8%. The increase was mainly attributable to the following factors: first,
the increased compensation for non-sales-related employees by $1.86 million,
which mainly resulted from the increased bonuses distributed and increased
staff
welfare fund provided by Hangzhou HollySys as required by the foreign investment
enterprise laws in China; second, an increase in office expenses (such as paper,
copying expenses, mailing fees, and utilities) by $308,000; third, an increase
in guarantee expenses paid to assurance companies by $211,000; fourth, an
increase in depreciation expenses by $61,000; and an increase in bad debt
provision by $17,000. As a percentage of total revenues, general and
administrative expense increased slightly, accounting for 6.5% and 5.1% for
the
years ended June 30, 2005 and 2004, respectively.
Research
and development expenses
Research
and development expenses were $202,000 and $383,000 for fiscal 2005 and 2004,
respectively. These amounts reflect the fact that subsidy income received from
the government of $3.54 million and $1.57 million for fiscal 2005 and 2004,
respectively, was used as a partial offset against research and development
expenses. Actual research and development expenses amounted to $1.22 million
and
$1.95 million for fiscal 2005 and fiscal 2004, respectively.
Income
from operations
Income
from operations increased approximately $6.44 million, or 86.7%, from $7.43
million in fiscal 2004 to $13.88 million in fiscal 2005. The increase was driven
primarily by the following facts: increase of $26.50 million in total revenues,
offsetting the increase of $16.78 million in cost of revenues, the increase
of
$1.12 million in selling expenses and the increase of $2.46 million in general
and administrative expenses. As a percentage of total revenues, the operating
income for fiscal 2005 was 17.4% compared to 14.0% for the prior year. The
increase as a percentage of total revenues was mainly due to a decrease in
cost
of revenue due to implementation of various cost-cutting measures, resulting
in
improved gross margins from 28.6% to 31.3% in fiscal 2005.
Interest
expenses, net
Approximately
$242,000 of governmental subsidy brought the net interest expenses down to
$556,000 from an actual amount of $889,000 for the fiscal year ended June 30,
2005. Compared to the prior year, the actual interest expense decreased by
$4,000, from $889,000 to $895,000 in fiscal 2005. The decrease was primarily
due
to the fact that the repayment of $4.59 million in long-term bank loans occurred
in fiscal 2005, although an additional $3.02 million of short-term loans were
taken down in fiscal 2005. The lower interest rate associated with those
short-term loans helped to reduce the interest expense.
Other
income (expenses), net
Net
other
income (expenses) amounted to $195,000 in fiscal 2005 compared to $32,000 in
the
prior year. The increase was due mainly to the income from more maintenance
and
training services provided to customers. Overall, the change in other income
(expense) was immaterial to the Company’s financial performance for fiscal 2005
and fiscal 2004.
Subsidy
income
Subsidy
income received from the government in fiscal 2005 amounted to $3.55 million
compared to $1.57 million in fiscal 2004. The Company used these subsidies
to
offset actual research and development expenses by approximately $1.02 million
in fiscal 2005, compared to $1.56 million in fiscal 2004. Also, approximately
$242,000 of financial subsidies from the government were used to offset the
interest expenses incurred in fiscal 2005. The remaining amounts of subsidy
income of $2.29 million and approximately $3,000 in fiscal 2005 and 2004,
respectively, were presented as a separate line item on the statement of
income.
Income
tax expenses
For
the
fiscal year ended June 30, 2005, the Company’s income taxes provision was
$401,000, compared with an income tax provision of $948,000 in the prior year.
This change was due to the difference in revenue recognition timing for
financial reporting and income tax purposes. In addition, the income tax
provision took place principally in connection with the Beijing location, as
Beijing HollySys and Haotong are subject to a preferential income tax rate
at
15% and 7.5%, respectively, whereas Hangzhou HollySys was exempt from income
taxes for both periods.
The
effective tax rate decreased from 14.0% in fiscal 2004 to 2.0% in fiscal 2005,
which was mainly due to benefits given to Hangzhou HollySys under preferential
income tax policies. Income before income taxes increased from $6.72 million
in
fiscal 2004 to $16.47 million in fiscal 2005, a $9.75 million increase. The
increase was mainly attributable to the fact that income before income taxes
of
Hangzhou HollySys increased significantly from $2.85 million in the prior year
to$11.97 million in fiscal 2005. In addition, Hangzhou HollySys was still exempt
from taxation in fiscal 2005. Therfore, the income tax rate reduction increased
from 14.9% to 24.1% when comparing fiscal 2004 to fiscal 2005.
Minority
interest
The
minority interest increased approximately $1.33 million, from $1.04 million
for
the prior year to $2.37 million for fiscal 2005. Of the $1.33 million of
increase, approximately $940,000 was caused by the increase in net income in
Hangzhou HollySys, from approximately $2.85 million for fiscal 2004 to
approximately $11.97 million in fiscal 2005. In addition, approximately $260,000
of the increase was attributable to Beijing HollySys and roughly $130,000 to
Haotong.
Net
income
For
fiscal 2005, the Company’s net income amounted to $13.70 million, an increase of
$8.97 million compared to $4.74 million in the prior year, a 189.4% increase.
This increase was attributable primarily to the increase in revenues and
implementation of effective cost-control measures; increase in government
subsidies recognized and decrease in income tax provision.
Comparison
of Fiscal Year Ended June 30, 2004 and 2003
Operating
revenues
For
the
fiscal year ended June 30, 2004, the Company’s total revenues amounted to $53.07
million, representing an increase of $17.09 million or 47.5% over revenues
of
$35.99 million in fiscal 2003. The increase was due mainly to the increase
in
integrated contract revenue by $18.3 million for fiscal 2004. The components
of
revenues changed slightly, as the integrated contract revenue went from 91.5%
of
total revenues for fiscal 2003 to 96.5% for fiscal 2004.
Of
the
$53.07 million of total revenue, the integrated contract revenue amounted to
$51.22 million, an increase by $18.30 million compared to revenues of $32.93
million for the prior year, a 55.6% increase. The increase was due primarily
to
a greater number of integrated contracts being performed for fiscal 2004; the
Company performed 967 contracts in fiscal 2004 compared to 645 in fiscal 2003,
a
49.9% increase. In addition, the Company successfully maintained and enlarged
its integrated contract revenue as a result of the following factors: first,
it
enhanced its bidding strategies for various contracts for various industries
in
fiscal 2004, especially from metallurgy and petrochemicals; second, its
intellectual property enabled it to obtain a competitive advantage over other
competitors; finally, its advanced integrated automation systems and solutions
and after market services increased the confidence of its customers that it
could meet their quality requirements.
Of
the
$53.07 million of total revenues, approximately $1.85 million was derived from
product sales, a decrease of approximately $1.21 million compared to $3.06
million in the prior year, a 39.5% decrease. This decrease was the result of
the
fact that the Company focused increasingly on sales of integrated systems,
of
which products are a component part, rather than on the sales of products
alone.
Cost
of revenues
The
total
cost of revenues amounted to $37.91 million, an increase by $12.03 million
compared to $25.88 million for the prior year, representing a 46.5% increase.
The increase was due to the increase in integrated contract revenue. The
components of cost of revenues changed as cost of integrated contract revenue
increased from 94.1% of total cost of revenues in fiscal 2003 to 99.1% in fiscal
2004.
The
total
cost of integrated contracts was $37.57 million, an increase of $13.22 million
compared to $24.35 million in the prior year, representing a 54.3% increase,
generally consistent with the increase in integrated contract revenue. As a
percentage of cost of integrated contract revenue, labor cost accounted for
6.6%
compared to 2.1% in the prior year, cost of equipment accounted for 70.4%
compared to 70.1% in the prior year, and other contract execution expenses
accounted for 23.0% which decreased from 27.8% in the prior year. As a
percentage of integrated contract revenue, labor cost accounted for 5.2%
compared to 5.1% in the prior year, cost of equipment accounted for 48.2%
compared to 47.0% in the prior year, and other contract execution expenses
accounted for 18.0% for both fiscal years. Due to the combined impact of these
changes in cost of integrated contract revenue, gross margins for integrated
contracts increased from 26.1% in fiscal 2003 to 26.7% in fiscal
2004.
Cost
of
products sold was $338,000, a decrease of $1.19 million compared to $1.53
million in the prior year, a 77.9% decrease. The decrease in cost of products
sold was due to the decrease in product sales revenue. In fiscal 2004, the
Company focused on assembling products into units, which increased the value
added by it. However, doing so ultimately reduced its total product sales
revenue because these units were customized, generating good gross margins
although at lower volumes, compared with the total product sales revenue for
fiscal 2003, when it purchased most of the products from outside vendors for
resale. As a result, the Company achieved significantly greater margins of
81.7%
from product sales in fiscal 2004, compared to 49.9% in fiscal
2003.
Gross
margin
As
a
percentage of total net revenues, the overall gross margin was 28.6% for the
fiscal year ended June 30, 2004, compared with 28.1% in the prior
year.
The
gross
margin for integrated contracts was 26.7% for fiscal 2004 compared to 26.1%
for
fiscal 2003. The slight increase from the prior year was attributed to the
use
of more aggressive pricing in bids in order to secure additional orders and
build up the number of contracts won, a practice which held margins in line
with
the prior year.
Operating
expenses
Selling
expenses
Selling
expense was $4.52 million for fiscal 2004, an increase of 51.0%, or $1.53
million, compared to $3.00 million for fiscal 2003. Of the increase of $1.53
million, $477,000 was attributed to payroll and employment benefits for sales
personnel, $468,000 was related to office supplies and utilities, $259,000
was
for entertainment expenses, $152,000 was for traveling expenses, $85,000 for
office leasing, $31,000 was for depreciation of fixed assets, $50,000 was for
bidding fees and $5,000 was for advertisement expenses in fiscal year 2004,
compared to the prior year. As a percentage of total revenues, selling expense
accounted for 8.5% and 8.3% for fiscal 2004 and 2003, respectively. The Company
established guidelines to monitor and evaluate sales performance in different
industries and regions to control selling expenses.
General
and administrative expenses
General
and administrative expenses amounted to $2.68 million for fiscal 2004, compared
to $2.61 million for fiscal 2004, representing an increase of just 2.5%. The
increase of $65,000 was mainly attributable to the following factors: first,
the
increased compensation for non-sales-related employees by $135,000; second,
an
increase in bad debt provision by $94,000; third, an increase in guarantee
expenses paid to assurance companies by $59,000; fourth, a decrease in office
expenses (such as paper, copying expenses, mailing fees, water and electricity)
by $190,000; and finally, an decrease in depreciation expenses by $33,000.
As a
percentage of total revenue, general and administrative expenses accounted
for
5.1% and 7.3% for fiscal 2004 and 2003, respectively. The Company was able
to
avoid increases in these expenses despite the Company’s increase in overall
revenues principally as the result of efficiency improvements.
Research
and development expenses
Research
and development expenses amounted to $383,000 and $346,000 for fiscal 2004
and
2003, respectively. This was due to the fact that subsidy income received from
the government of $1.57 million for fiscal 2004 and $1.12 million for fiscal
2003, respectively, partially offset research and development expenses. Actual
research and development expenses amounted to $1.95 million and $827,000 for
fiscal 2004 and fiscal 2003, respectively.
Income
from operations
Income
from operations increased approximately $3.92 million, or 111.4%, from $3.52
million in fiscal 2003 to $7.43 million in fiscal 2004. This increase was
attributed principally to the following increases: $17.09 million in total
revenues, offset by increases of $12.03 million in cost of revenues and $1.53
million in selling expenses. As a percentage of total revenue, the operating
income for fiscal 2004 accounted for 14.0% compared to 9.8% for the prior year.
The increase as a percentage of total revenues was due mainly to the increase
in
total revenues, as well as implementation of cost control measures, which
resulted in revenues growing faster than the increase in operating expenses,
and
an increase in government subsidies, which offset research and development
expenses significantly.
Interest
expenses, net
For
the
fiscal year ended June 30, 2004, net interest expense decreased slightly, by
$72,000, or 7.9%, from $904,000 for fiscal 2003 to $832,000. The actual interest
expenses were $894,000 and $943,000 for fiscal years 2004 and 2003,
respectively. In addition, the Company received $62,000 of interest income
in
fiscal 2004 compared to $39,000 in the prior year. As a percentage of total
revenues, interest expenses accounted for 1.6% and 2.5% for fiscal 2004 and
2003, respectively. Apart from the increased total revenues, the decline was
primarily attributable to enhanced management of working capital.
Other
income (expenses), net
Net
other
income (expenses) amounted to $32,000 in fiscal 2004 compared to $21,000 in
the
prior year. The change in other income (expense) was immaterial to the Company’s
overall financial performance for fiscal 2004 and fiscal 2003.
Subsidy
income
Net
subsidy income amounted to $3,000 in fiscal 2004 compared to $635,000 in the
prior year. Total subsidy income received from the government in fiscal 2004
amounted to $1.57 million compared to $1.12 million in the prior year. The
Company used these subsidies to offset reported research and development
expenses by approximately $1.56 million in fiscal 2004 compared to $481,000
in
fiscal 2003. The remaining amounts of $3,000 and $635,000 in fiscal 2004 and
2003, respectively, were presented as a separate line item on the statement
of
income.
Income
tax provision
For
the
fiscal year ended June 30, 2004, the income taxes provision was $948,000,
compared to an income tax provision of $637,000 in the prior year. This change
was due to the difference in revenue recognition timing for financial reporting
and income tax purposes.
The
effective tax rate decreased from 18.0% in the prior year to approximately
14.0%
in fiscal 2004. This was due mainly to benefits realized as a result of
preferential income tax policies applied to Haotong and Hangzhou HollySys.
The
income tax rate reduction increased from 13.8% to 14.9% when comparing the
effective tax rate of fiscal 2003 to that of fiscal 2004.
Minority
interest
The
minority interest amounted to $1.04 million and $650,000 for fiscal 2004 and
2003, respectively. The increase in minority interest was due to the increase
in
net income in Hangzhou HollySys from zero in fiscal year 2003 to approximately
$2.85 million in the second half of fiscal 2004, which resulted in an increase
of $0.3 million in minority interests.
Net
income
For
fiscal 2004, net income was $4.74 million after deducting the portion attributed
to minority interest, an increase by $2.51 million compared to $2.23 million
in
the prior year, a 112.6% increase. These increases were attributable primarily
to the increase in revenues.
LIQUIDITY
AND CAPITAL RESOURCES
To
date,
the Company has financed its operations primarily through cash flows from
operations as well as short term and long term borrowings from
banks.
As
of
December 31, 2005, the Company had total assets of $110.65 million, of which
cash amounted to $12.93 million, accounts receivable amounted to $55.00 million
and inventories amounted to $7.42 million. While working capital was
approximately $29.52 million, equity amounted to $36.81 million. The quick
ratio
was approximately 1.4:1.
Comparison
of Six Months Ended December 31, 2005 and 2004
Net
cash
provided by operating activities totaled $7.30 million for the six months ended
December 31, 2005, a increase in positive cash flow by $4.09 million compared
to
$3.21 million in the same period in the prior year, representing a 127.3%
increase. This increase resulted primarily from the following factors: 1) the
increase of approximately $1.42 million in net income and the changes in
non-cash adjustments ($59,000 increase in bad debt allowance, $420,000 increase
in provision for inventory obsolescence, $48,000 increase in depreciation and
amortization, and $552,000 increase in minority interest); and 2) the following
changes in the cash flow from operating assets and liabilities:
|
·
|
$3.33
million decrease from accounts
receivable;
|
|
·
|
$248,000
decrease from inventory;
|
|
·
|
$1.05
million decrease from other receivable
(negative);
|
|
·
|
$843,000
increase from deposits and other assets
(negative);
|
|
·
|
$104,000
increase in advance to suppliers;
|
|
·
|
$3.01
million decrease from advance from customers
(negative);
|
|
·
|
$125,000
decrease in tax payable (positive);
|
|
·
|
$2.01
million increase from accounts payable and
|
|
·
|
$1.15
million increase from accrued
liabilities.
|
The
increases in cash used by accounts receivable and other receivable were
consistent with the increase in revenue; however the Company understands it
needs to enhance its collection effort to collect as much as possible of its
receivables. The increases in accounts payable and accrued liabilities were
consistent with the increase in accounts receivable and other receivable as
the
Company has obtained very favorable payment terms with its suppliers to enhance
its working capital position. The increase in provision for inventory
obsolescence was due to the fact that certain previously purchased hardware
products were subject to upgrade; therefore, the net realizable value of these
hardware products may be reduced.
Net
cash
used by investing activities was $4.67 million and $731,000 for the six months
ended December 31, 2005 and 2004, respectively. The cash used by investing
activities consisted mainly of capital expenditures related to purchases of
property, plant and equipment, construction projects and short-term and
long-term investments. The increase in purchases of fixed assets was
approximately $4.14 million for the six months ended June 30, 2005 compared
to
$2.96 million for the same period of the prior year. The increase in property
and equipment expenditure was incurred in Hangzhou HollySys, as this company
occupied a relatively newly-constructed facility requiring machinery and
equipment purchases. In the six months ended December 31, 2005, the Company
received the proceeds of approximately $407,000 from disposing its short-term
investment compared to the proceeds of $1.81 million in the same period of
the
prior year and interest income received of $149,000 from short-term investment
in the same period of the prior year. In addition, it also had cash
disbursements for long-term investments of approximately $1.29 million for
a 50%
interest in Beijing Tech Energy Co., Ltd. and a 20% interest in Beijing HollySys
Equipment Technology Co., Ltd. for future automation systems
development.
Cash
flows provided by financing activities amounted to $554,000 and $3.14 million
(negative) for the six months ended December 31, 2005 and 2004, respectively.
Cash flows generated by financing activities consist of proceeds of bank
borrowings and disbursements for repayments to bank loans, dividend payments
and
amounts due to related parties. For the six months ended December 31, 2005,
the
Company obtained net proceeds of $888,000 from short-term bank loans compared
to
repayments of short-term bank loans up to $4.11 million in the same period
of
the prior year. Also, it made repayments of long-term bank loans up to $1.01
million in the six months ended December 31, 2005 while it obtained proceeds
of
long-term bank loans up to $4.83 million and made repayments of $3.99 million
in
the same period of the prior year. In addition, there was a dividend payment
of
approximately $334,000 by Beijing HollySys which did not occur in the same
period of the prior year. Amount due to related parties were $1.01 million
and
$119,000 for the six months ended December 31, 2005 and 2004. The increase
of
$888,000 was mainly due to the fact that d
uring
the
six months ended December 31, 2005, one of investors in
Beijing
HollySys
intended to acquire additional 20% interest in Hangzhou HollySys for a
consideration of RMB35.7 million and made an advance of RMB9 million (equivalent
of approximately $1.12 million) to
Beijing
HollySys.
However, this transaction did not consummate during this six-month period as
the
investor was unable to obtain adequate cash for the remaining balance of the
consideration. The outstanding amount of $1.12 million will be returned to
the
investor during the first quarter of calendar year 2006.
Comparison
of Fiscal Years Ended June 30, 2005 and 2004
Net
cash
provided by operating activities amounted to $3.61 million, representing a
decrease by $4.59 million compared to $8.20 million in the prior year, a 56.0%
decrease. This decrease resulted primarily from the comparison of the following
factors: 1) increase in net income by $8.97 million, among the non-cash items,
increase in minority interest by $1.33 million, decrease in depreciation and
amortization by $100,000, and decrease in cash flow due to the increase in
investment income by $574,000; and 2) the following changes in cash flow from
the operating assets and liabilities:
|
·
|
$11.05
million of increase in accounts receivable (negative cash
flow);
|
|
·
|
$4.77
million of decrease in inventory;
|
|
·
|
$976,000
of decrease in advance to
suppliers;
|
|
·
|
$428,000
of increase in other receivable (negative cash
flow);
|
|
·
|
$189,000
of decrease in deposits and other assets;
|
|
·
|
$7.52
million of decrease in advance from customers (negative cash
flow);
|
|
·
|
$1.22
million of increase in accounts payable;
|
|
·
|
$597,000
of decrease in accruals and other payable (negative cash flow); and
|
|
·
|
$1.67
million of decrease in income tax
payable.
|
The
increase in accounts receivable was the result from the increase in revenue,
and
the decrease in advance from customers was a result of timing of recognizing
revenue. The inventory balance was reduced by $1.17 million compared to the
inventory balance as of June 30, 2004. All of other changes were the result
of
revenue recognition.
Net
cash
used in investing activities decreased slightly from $4.26 million in the prior
year to $3.57 million in fiscal 2005, representing a 16.1% decrease. The major
item in investing activities was $5.69 million of cash disbursements for
purchases of fixed assets compared to $1.9 million cash disbursements for the
prior year, representing a capital expenditures increase of $3.77 million in
fiscal 2005, which was for Hangzhou HollySys to acquire machinery and equipment.
In order to finance capital expenditures, the Company disposed its short-term
investment and received cash proceeds of approximately $1.81 million, which
mitigated the large cash disbursement for purchasing fixed assets. Also, it
received proceeds of approximately $358,000, which was mainly from disposing
of
its long-term investments in HollySys Communication Equipment Co., Ltd. and
Dongfangjinhe Environmental Technology Co., Ltd. In the prior year, it incurred
cash disbursement to purchase short-term investments for approximately $2.29
million which established the basis for proceeds of $1.81 million in fiscal
2005. In addition, the Company also had cash disbursement of $225,000 for
long-term investment compared to $143,000 in the prior year. In addition, it
received dividends from long-term investments amounting to $20,000 and interest
income from short-term investments of $149,000, compared to dividends from
long-term investments of $45,000 and interest income from short-term investments
of $42,000 in the prior year.
Net
cash
provided by financing activities amounted to $1.90 million, an increase by
$1.40
million compared to cash flow of $501,000 provided by financing activities
for
fiscal 2004, representing a 279.3% increase. In order to finance capital
expenditures and other working capital needs, the Company obtained net proceeds
of $3.02 million from short-term bank loans and $6.65 million from long-term
bank loans offsetting the repayment of $6.4 million of long-term bank loans
in
fiscal 2005; whereas it obtained net proceeds of $1.69 million from short-term
bank loans and incurred repayment of $2.05 million to long-term bank loans
in
fiscal 2004. In fiscal 2004, the Company received cash infusion from two owners
in Hangzhou HollySys for $600,000 while there were no similar cash flows in
fiscal 2005. In addition, Beijing HollySys distributed dividends totaling $1.51
million in fiscal 2005, while there were no such dividends paid out in fiscal
2004. The cash flow in connection with amount due to related parties decreased
by $120,000 in fiscal 2005 compared to the cash flow in connection with amount
due to related parties of $264,000 in fiscal 2004.
Comparison
of Fiscal Years Ended June 30, 2004 and 2003
Net
cash
provided by operating activities amounted to $8.20 million, representing an
increase of $7.73 million compared to the net cash of $467,000 provided by
operating activities for fiscal 2003. This increase in cash flow provided by
operating activities resulted primarily from the comparison of the following
factors: 1) increase in net income by $2.51 million and the changes in non-cash
adjusting items including increase in minority interest by $391,000 (positive),
increase in depreciation and amortization by $233,000 (positive), decrease
in
investment income by $156,000 (positive); and 2) the changes in cash flow from
the operating assets and liabilities, principally from the
following:
|
·
|
$3.29
million of increase in accounts receivable
(negative);
|
|
·
|
$2.91
million of increase in inventory
(negative);
|
|
·
|
$1.80
million of increase in advances to suppliers
(negative);
|
|
·
|
$412,000
increase in other receivable
(negative);
|
|
·
|
$318,000
of decrease in deposits and other assets (positive);
|
|
·
|
$5.68
million of increase in advance from customers
(positive);
|
|
·
|
$3.91
million of increase in accounts payable
(positive);
|
|
·
|
$3.15
million of increase in accrued liabilities (positive);
and
|
|
·
|
$134,000
of increase in tax payable.
|
The
increase in accounts receivable was the result from the increase in revenue.
The
increases in advance to suppliers and in inventory for fiscal 2004 were the
basis for the increase of revenue in fiscal 2005 compared to the increases
in
advance to suppliers and inventory for fiscal 2003. Along with the increase
in
revenue, the balance in other receivable also increased resulting in a negative
cash flow of $412,000 compared to the balance of other receivable for fiscal
2003. The increase in advance from customers, in accounts payables, and accrued
liabilities provided the Company with a reasonable cushion for working capital
purpose. All of those changes were the result of revenue
recognition.
Net
cash
used in investing activities increased from $2.51 million in fiscal 2003 to
$4.26 million in fiscal 2004, representing a 69.8% increase in fiscal 2004.
The
increase in cash flow used in investing activities was due mainly to purchase
of
short-term investments by $2.29 million, an increase by $2.02 million compared
to only $269,000 in fiscal 2003, representing a 749.6% increase, which provided
a cash surplus available for future investment. Capital expenditures in fiscal
2004 were approximately $1.91 million, an increase by $281,000 compared to
$1.63
million for fiscal 2003, representing a 17.2% increase. In fiscal 2003, the
Company spent approximately $687,000 to acquire 70% equity interest in Haotong
while there was no such cash disbursement in fiscal 2004.
Net
cash
flow provided by financing activities totaled $501,000 in fiscal 2004, a
decrease by $308,000 compared to $809,000 for fiscal 2003, representing a 38.1%
decrease. In fiscal 2004, the Company obtained net borrowing from short-term
bank loans by $1.69 million whereas there was a net repayment of $2.05 million
in fiscal 2003, a net change of $3.75 million. It made a repayment of long-term
bank loans of $2.05 million in fiscal 2004 compared to $2.00 million in fiscal
2003. Also, it obtained proceeds of $4.83 million from long-term bank loans
in
fiscal 2003 compared to the zero proceeds in fiscal 2004. In fiscal 2004, it
increased the amount due to related parties by approximately $263,000 whereas
it
increased the amount due to related parties by only $24,000 in fiscal 2003.
As a
result of these changes, the financing activities for fiscal 2004 created a
decrease of $308,000 compared to the financing activities for fiscal
2003.
Working
Capital
The
Company’s working capital has been increasing over the reporting periods with
growth rates of 90.1% between fiscal 2005 and 2004 and 31.8% between the
six-month periods ended December 31, 2005 and 2004, respectively.
Total
current assets at June 30, 2005 amounted to $78.48 million, an increase by
approximately $21.97 million compared to $57.51 million at June 30, 2004. Total
current assets increased up to approximately $87.84 million at December 31,
2005. The increases was attributable mainly to larger amounts of accounts
receivable, other receivables and advances to suppliers, all of which resulted
from increasing operating results. The accounts receivable were classified
into
billed and unbilled accounts receivables based on the percentage of completion
method for revenue recognition. Other receivables include deposits required
by
the contract bidding service providers for every contract bid for and shipping
freight expenses paid on behalf of customers which are not presented on invoices
issued by the Company for revenue recognition purpose. Normally, the Company
makes a down payment to its suppliers mainly for the purchases of equipment
and
materials to fulfill its commitments to its customers. Therefore, the growing
balances of accounts receivable, other receivables and advances to suppliers
reflect the increased operating revenues.
Current
liabilities amounted to $58.32 million at December 31, 2005, in comparison
to
$56.08 million at June 30, 2005 and $45.72 million at June 30, 2004,
respectively. The increases have been attributable mainly to the increases
in
short-term loans, accounts payable, deferred revenue, accrued payrolls, warranty
liabilities and other tax payables. In order to optimize its debt structure,
the
Company has increased its short-term borrowings while decreasing the proportion
of long-term borrowings for obtaining benefit from the relatively lower interest
rates. The increased accounts payable was due to the fact that it received
favorable payment terms from its vendors and maintained the timely payments
in
order to better manage its daily cash flow. Deferred revenue resulted from
the
excess of the billed amounts over revenues recognized on the contracts and
the
billings were rendered based on agreed milestones included in the contracts
with
customers. Therefore, deferred revenue was in the nature of advances from
customers. The increase in deferred revenue was an important component of
working capital and related closely to the Company’s revenue growth. Accrued
liabilities mainly consisted of employee welfare provision of Beijing HollySys,
Haotong and Hangzhou HollySys according to various Chinese laws, and one-month
accrued salary expenses and year-end bonuses. The Company provided warranty
expenses to its customers for after-sales services. Warranty liabilities were
provided based on 1.5% of the integrated contract revenue during the period
and
the difference from the former period, and were charged into selling expense.
Other tax payables mainly consisted of value added tax (“VAT”) payable during
the period and the enlarged VAT payable amount was resulted from the revenue
growth over these periods.
The
current ratio increased from 1.26 at June 30, 2004 to 1.40 at June 30, 2005,
and
increased to 1.51 at December 31, 2005. The changes in current ratio were due
mainly to the growth of operating activities. In order to finance operating
activities, the Company had maintained a good standing of current ratio due
primarily to the following three factors: first, enhance accounts receivable
collection; second, increase the accounts payable and meet a timely payment
schedule; and third, increase short-term debts in order to facilitate
flexibility of borrowing.
Capital
Resources
The
Company has obtained working capital through several ways. First, it obtained
short-term and long-term bank loans. Second, its suppliers were willing to
provide it with extended payment terms which would not force it to increase
bank
borrowings unless it planned to increase its operating scale significantly.
Third, through the improved biding mechanism, it asked its customers to increase
their payments in the early stage of contract performance process to diminish
its working capital demands for daily operations. Fourth, it has maintained
good
relationships with commercial banks which provided it with the necessary bank
financing. At December 31, 2005, the Company had established standby credit
facilities with domestic commercial banks for aggregate approximately $33.36
million to finance any funding needs related to its projects and relevant
working capital requirements. Finally, it may issue corporate bonds to the
public in the future. The Company believes that it will be able to obtain
adequate cash flow for its operating activities and will continue to improve
its
cash collection to satisfy the cash demands from its daily
operations.
CONTRACTUAL
OBLIGATIONS AND COMMITMENTS
The
following table sets forth the Company’s contractual obligations, including
long-term and short-term loans and operating leases, and capital and operational
commitments at of June 30, 2005.
|
Item
|
Less
than 1 year
|
1-2
years
|
2-3
years
|
3-5
years
|
More
than 5 years
|
Total
|
|||||||||||||
|
$
|
$
|
$
|
$
|
$
|
$
|
||||||||||||||
|
Long-term
Bank Loans
|
1,208,240
|
6,645,321
|
-
|
-
|
-
|
7,853,561
|
|||||||||||||
|
Interest
payable
|
34,646
|
741,437
|
-
|
-
|
-
|
776,083
|
|||||||||||||
|
Short-term
Bank Loans
|
8,699,329
|
-
|
-
|
-
|
-
|
8,699,329
|
|||||||||||||
|
Interest
payable
|
281,354
|
281,354
|
|||||||||||||||||
|
Short-term
loan from a related party
|
2,416,480
|
-
|
-
|
-
|
-
|
2,416,480
|
|||||||||||||
|
Interest
payable
|
51,809
|
51,809
|
|||||||||||||||||
|
Operating
Lease Commitment (1)
|
50,000
|
-
|
-
|
-
|
-
|
50,000
|
|||||||||||||
|
Purchase
Commitment (2)
|
1,614,946
|
-
|
-
|
-
|
-
|
1,614,946
|
|||||||||||||
|
Total
|
14,356,804
|
7,386,758
|
21,743,562
|
||||||||||||||||
(1)
Operating
Lease Commitment
Beijing
HollySys entered into a lease agreement with HollySys Information Technology
Co., Ltd., in which HollySys holds 40% interest, to lease office space. The
lease agreement is renewable on an annual basis. The basic rental price has
ranged from RMB1.4 or RMB1.5 per square meter per day during the past five
years. The total rental per year depends on the actually total square meters
leased each year. The total rental expense for the years ended June 30, 2003,
2004 and 2005 was $107,000, $116,000, and $57,000, respectively. The rental
expense for the six months ended December 31, 2004 and 2005 was $28,251 and
$22,736, respectively.
(2)
Purchase
Commitment
As
of
June 30, 2005, the Company had approximately $1.61 million in purchase
obligations including $1,493,533 for construction of factory premises and
$121,414 for purchases of equipment, mainly for Hangzhou HollySys.
|
RMB
|
US
Dollars
|
||||||
|
Plant
and building construction
|
12,361,225
|
1,493,533
|
|||||
|
Equipment
|
1,004,880
|
121,414
|
|||||
|
Total
|
13,366,105
|
1,614,946
|
|||||
Other
than the contractual obligation and commercial commitments set forth above,
the
company does not have any other long-term debt obligations, operating lease
obligations, purchase obligations or other long-term liabilities.
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company has not entered into any financial guarantees or other commitments
to
guarantee the payment obligations of any third parties as of December 31, 2005.
It has have not entered into any foreign currency forward contract. It does
not
have any other off-balance sheet arrangements except for the contractual
obligations and commitments mentioned above as of December 31, 2005. The Company
believes that there are no off-balance sheet arrangements that have or are
reasonably likely to have a material effect on its financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
EMPLOYEES
AND THEIR BENEFITS
At
December 31, 2005, Beijing HollysSys and Hangzhou HollySys had a total
of approximately 1,000 employees. The remuneration package of the
employees includes salary, bonuses and allowances. Employees also receive
welfare benefits including workers’ insurance, medical care, housing subsidies,
child care and education, and other miscellaneous items.
The
Company believes that its success in attracting and retaining highly skilled
technical employees and sales and marketing personnel is largely a product
of
its commitment to providing a motivating and interactive work environment that
features continuous and extensive professional development opportunities, as
well as frequent and open communications at all levels of the
organization.
RECENT
ACCOUTING PRONOUNCEMENTS
In
November 2004, the FASB issued Statement of Accounting Standards No. 151,
“Inventory Costs, an Amendment of ARB No. 43, Chapter 4” (SFAS No. 151). SFAS
No. 151 eliminates the “so abnormal” criterion in ARB No. 43 “Inventory
Pricing.” SFAS No. 151 no longer permits a company to capitalize inventory costs
on its balance sheets when the production defect rate varies significantly
from
the expected rate. SFAS No. 151 reduces the differences between U.S. and
international accounting standards. SFAS No. 151 is effective for inventory
costs incurred during annual periods beginning after June 15, 2005. The Company
does not believe that this pronouncement will have a material effect on its
financial position and net income.
In
December 2004, the FASB issued the Statement of Financial Account Standards
No. 153, “Exchange of Nonmonetary Assets, An Amendment of APB Opinion
No. 29” (SFAS No. 153). SFAS No 153 addresses the measurement of
exchanges of nonmonetary assets. SFAS No. 153 eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets
in
paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary
Transactions, and replaces it with an exception for exchanges that do not have
commercial substance. SFAS No. 153 specifies that a nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected
to
change significantly as a result of the exchange. The provisions of SFAS
No. 153 shall be effective for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. Earlier application is
permitted for nonmonetary asset exchanges occurring in fiscal periods beginning
after the date this Statement is issued. The provisions of this Statement shall
be applied prospectively. The Company does not believe that this pronouncement
will have a material effect on its financial position and net
income.
In
May 2005, the FASB issued Statement No. 154, “Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes,
and Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements.” (SFAS No. 154). SFAS No. 154 changes the requirements for
the accounting for, and reporting of, a change in accounting principle.
Previously, most voluntary changes in accounting principles were required to
be
recognized by way of a cumulative effect adjustment within net income during
the
period of the change. SFAS No. 154 generally requires retrospective
application to the prior period financial statements of voluntary changes in
accounting principles. SFAS No. 154 is effective for accounting changes
made in fiscal years beginning after December 15, 2005. However, SFAS
No. 154 does not change the transition provisions of any existing
accounting pronouncements. The Company does not believe that the adoption of
SFAS No. 154 will have a material effect on its results of operations or
financial condition.
QUANTITATIVE
AND QUALITATIVE MARKET RISKS
Industrial
environment and national industrial development policies
The
Company is highly sensitive to industry environment changes and state industrial
development policies. State industrial development policies have established
clear targets for market capacities of automation systems in the short and
long
run. These are crucial to the development of the Company, especially for rail
transport and nuclear power plant automation systems. At present, state policies
are favorable to the Company’s development. If the government ceases supporting
the rail transportation and nuclear industries, however, it would bring about
a
negative impact on operating results in the next a few years.
The
Company relies on market research and technology development to ensure that
it
delivers attractive, high-quality products and services to its customers as
a
way to protect against risks connected with a change in the competitive
environment.
Taxation
risk
As
a
result of various tax regulations, Beijing HollySys, Hangzhou HollySys and
Haotong HollySys are entitled to the benefits afforded by certain preferential
income tax policies. These preferential tax policies will terminate in one
to
three years.
With
the
aim of attracting foreign investment, the Chinese government provides favorable
income tax rates to foreign-invested enterprises in China at the levels of
15%,
24% and 30%. Domestic-invested enterprises, on the other hand, normally are
subject to a 33% income tax rate. The Chinese government has indicated that
it
intends to eliminate differences between the applicable tax rates of domestic
and foreign-invested enterprises, but the schedule for the unification of tax
rates has not yet been established. When the preferential tax treatment is
ended, it will increase taxes and reduce the Company’s after tax
profits.
Additionally,
the China government provides subsidies (sourcing from the proceeds of VAT
collected) to all domestic enterprises which are involved in software
development. Since this subsidy policy became effective, the Company has enjoyed
subsidies for software development, which has been an integral part of the
Company’s integrated contracts. The subsidy policy will cease at the end of
2010. When the termination of the subsidy policy occurs, it will cause after-tax
income to decline by approximately 3%.
The
Company is confident that its continuing business development coupled with
effective cost-control methods, will contribute to achieving positive financial
results that will offset the adverse impacts that will result from the
elimination of these tax preferences.
Foreign
exchange risk
The
Company conducts its business primarily in Chinese RMB currency, although it
does have plans to expand its business internationally.
RMB
is
not a freely convertible currency. The restrictions on foreign exchange imposed
by the Chinese government may result in the material differences between the
future exchange rate and the current exchange rate or historical exchange rate.
The changes in the exchange rate of RMB currency will impose foreign exchange
translation risk on the Company’s financial statements and impact the Company’s
ability to carry out operations related to foreign exchange. Those changes
also
will impact its ability to pay dividends in US dollars. The Company believes
that, however, it is, and will be, able to obtain sufficient foreign exchange
to
implement the above-mentioned operations and hedge against foreign exchange
risk.
Interest
rate risk
Over
the
years, the Company has tended to obtain proceeds from short-term bank loans
for
working capital financing purpose. Therefore, it is subject to market rate
risks
due to fluctuations in interest rates charged on these loans. All the short-term
bank loans (maturing from six months to one year) had fixed interest rates
ranging from 5.22% to 5.76% per annum. However, when these short-term bank
loans
are renewed, the interest rates are subject to change based on the notice from
the People’s Bank of China, the central bank of China. It is not possible to
know if those interest will increase, or by how much.
Most
of
the short-term bank loans were guaranteed by the Company related parties and
third parties and one bank loan of $2,416,480 at June 30, 2005 in Hangzhou
HollySys was collateralized by its plant and property. This was a bank loan
payable to a commercial bank which served as a trustee appointed by HollySys
Information Technology Co., Ltd. in which HollySys holds 40% interest. This
loan
had interest rate of 5.31%, and 5.76% at June 30, 2004 and 2005, which is the
same market rate charged by that commercial bank for the loans lent with similar
terms to the similarly situated borrowers.
The
following table provides information, by maturity dates, regarding the Company’s
interest rate sensitive financial instruments, which consist of fixed rate
short-term and long-term debt obligations as of June 30, 2005.
|
Lender
|
Balance
at June 30, 2005
|
Maturity
Date
|
Interest
Rate
|
Floating
or Fixed Interest Rate
|
Current
portion
|
|||||||||||
|
Long-term
loans
|
||||||||||||||||
|
Industrial
and Commercial Bank of China
|
1,208,240
|
December
26, 2005
|
5.58
|
%
|
Fixed
rate
|
1,208,240
|
||||||||||
|
Bank
of Beijing
|
1,812,360
|
July
15, 2007
|
5.49
|
%
|
Fixed
rate
|
|||||||||||
|
CITIC
Trust & Investment Co., Ltd.,
|
4,832,961
|
January
21, 2007
|
7.002
|
%
|
Fixed
rate
|
|||||||||||
|
Total
|
7,853,561
|
1,208,240
|
||||||||||||||
|
Short-term
loans
|
||||||||||||||||
|
Agricultural
Bank of China
|
2,416,480
|
March
11, 2006
|
6.138
|
%
|
Fixed
rate
|
|||||||||||
|
CITIC
Industrial Bank
|
1,208,240
|
September
8, 2005
|
5.22
|
%
|
Fixed
rate
|
|||||||||||
|
CITIC
Industrial Bank
|
1,208,240
|
October
13, 2005
|
5.22
|
%
|
Fixed
rate
|
|||||||||||
|
China
Merchants Bank
|
1,208,240
|
July
28, 2005
|
5.22
|
%
|
Fixed
rate
|
|||||||||||
|
Industrial
and Commercial Bank of China
|
2,416,480
|
May
31, 2006
|
5.58
|
%
|
Fixed
rate
|
|||||||||||
|
Bank
of Beijing
|
241,648
|
December
27, 2005
|
6.138
|
%
|
Fixed
rate
|
|||||||||||
|
Total
|
8,699,329
|
|
|
|
|
|||||||||||
|
Short-term
bank loan from related parties
|
|
|||||||||||||||
|
HollySys
Information Technology
|
2,416,480
|
November
5, 2005
|
5.76
|
%
|
Fixed
rate
|
|||||||||||
|
Total
|
2,416,480
|
|||||||||||||||
FUTURE
DEVELOPMENT AND BUSINESS STRATEGIES
The
Company’s goal is to become one of the leading automation and process control
system companies over the world. It plans to concentrate its research and
development resources on core technologies such as I/O signal processing
technology, network protocol interface, HOLLiAS DCS platform, software
development and application system design to maintain technological advantages
over the Company’s competitors. The Company’s principal elements of business
strategies are:
|
·
|
To
maintain leadership in China’s DCS
market;
|
|
·
|
To
enhance the Company’s leading position in
technology;
|
|
·
|
To
leverage the Company’s large customer base to offer total solutions;
and
|
|
·
|
To
focus on high-value tailored technology
services.
|
INFORMATION
ABOUT CHARDAN
Business
of Chardan
General
Chardan
was formed on March 10, 2005, to serve as a vehicle to effect a stock purchase,
capital stock exchange, asset acquisition or other similar business combination
with an unidentified operating business that has its primary operating
facilities located in the PRC in any city or province north of the Yangtze
River. Prior to executing the stock purchase agreement with the HollySys
Stockholders, Chardan’s efforts were limited to organizational activities,
completion of its initial public offering and the evaluation of possible
business combinations.
Offering
Proceeds Held in Trust
Chardan
consummated its initial public offering in August 2005. The net proceeds of
the
offering, after payment of underwriting discounts and expenses, were
approximately $30.9 million. Of that amount, approximately
$29.8 million was placed in the trust account and invested in government
securities. The remaining proceeds have been or are being used by Chardan in
its
pursuit of a business combination. The trust account will not be released until
the earlier of the consummation of a business combination or the liquidation
of
Chardan. The trust account contained approximately $30,260,861 as of December
31, 2005. If the stock purchase with the HollySys Stockholders is consummated,
the trust account will be released to Chardan, less:
|
·
|
amounts
paid to stockholders of Chardan who do not approve the stock purchase
and
elect to convert their shares of common stock into their pro-rata
share of
the trust account; and
|
|
·
|
the
cash payment being paid to the HollySys Stockholders in the stock
purchase.
|
Fair
Market Value of Target Business
Pursuant
to Chardan’s Certificate of Incorporation, the initial target business that
Chardan acquires must have a fair market value equal to at least 80% of
Chardan’s net assets at the time of such acquisition. Chardan’s board of
directors determined that this test was clearly met in connection with its
acquisition of HollySys.
Stockholder
Approval of Business Combination
Chardan
will proceed with the acquisition of HollySys only if a majority of all of
the
outstanding shares of Chardan is voted in favor of the stock purchase and
Redomestication Merger proposals. The stockholders existing prior to the initial
public offering have agreed to vote their common stock on these proposals in
accordance with the vote of the majority offering. If the holders of 20% or
more
of Chardan’s common stock vote against the stock purchase proposal and demand
that Chardan convert their shares into their pro rata share of the trust
account, then Chardan will not consummate the stock purchase. In this case,
Chardan would be able to present another potential business combination to
its
stockholders, subject to the time limitations set forth below.
Liquidation
if no business combination
If
Chardan does not complete a business combination by February 10, 2007, or
by August 10, 2007 if the extension criteria described below have been
satisfied, Chardan will be dissolved and will distribute to all of its public
stockholders, in proportion to their respective equity interests, an aggregate
sum equal to the amount in the trust account, inclusive of any interest, plus
any remaining net assets. Chardan’s existing stockholders have waived their
rights to participate in any liquidation distribution with respect to shares
of
common stock owned by them immediately prior to the initial public offering.
There will be no distribution from the trust account with respect to Chardan’s
warrants.
If
Chardan were to expend all of the net proceeds of the initial public offering,
other than the proceeds deposited in the trust account, the per-share
liquidation price as of December 31, 2005 would be $5.26, or $0.74 less than
the
per-unit offering price of $6.00 in Chardan’s initial public offering. The
proceeds deposited in the trust account could, however, become subject to the
claims of Chardan’s creditors and there is no assurance that the actual
per-share liquidation price will not be less than $5.26, due to those
claims.
If
Chardan enters into either a letter of intent, an agreement in principle or
a
definitive agreement to complete a business combination prior to
February 10, 2007, but is unable to complete the business combination by
February 10, 2007, then Chardan will have an additional six months in which
to complete the business combination contemplated by the letter of intent,
agreement in principle or definitive agreement. If Chardan is unable to do
so by
August 10, 2007, upon notice from Chardan, the trustee of the trust account
will commence liquidating the investments constituting the trust account and
will turn over the proceeds to the transfer agent for distribution to the
stockholders holding shares acquired through the initial public
offering.
The
stockholders holding shares of Chardan common stock issued in the initial public
offering will be entitled to receive funds from the trust account only in the
event of Chardan’s liquidation or if the stockholders seek to convert their
respective shares into cash and the stock purchase is actually completed. In
no
other circumstances shall a stockholder have any right or interest of any kind
to or in the trust account.
Facilities
Chardan
maintains executive offices at 625 Broadway, Suite 1111, San Diego, California
92101. The cost for this space is included in a $7,500 per-month fee that
Chardan Ventures, an affiliate of Dr. Richard D. Propper, Jiangnan Huang and
Zhang Li, charge Chardan for general and administrative services. Chardan
believes, based on rents and fees for similar services in the San Diego area,
that the fees charged by Chardan Ventures are at least as favorable as Chardan
could have obtained from an unaffiliated person. Chardan considers its current
office space adequate for current operations.
Employees
Chardan
has four directors, three of whom also serve as officers. These individuals
are
not obligated to contribute any specific number of hours to Chardan’s business
per week, and they intend to devote only as much time as they deem necessary
to
Chardan’s affairs. Chardan has no paid employees.
Periodic
Reporting and Audited Financial Statements
Chardan
has registered its securities under the Securities Exchange Act of 1934 and
has
reporting obligations, including the requirement to file annual and quarterly
reports with the SEC. In accordance with the requirements of the Securities
Exchange Act of 1934, Chardan’s annual reports will contain financial statements
audited and reported on by Chardan’s independent accountants. Chardan has filed
with the Securities and Exchange Commission a Form 10-QSB covering the fiscal
quarter ended September 30, 2005.
Legal
Proceedings
There
are
no legal proceedings pending against Chardan.
Plan
of Operations
The
following discussion should be read in conjunction with Chardan’s Financial
Statements and related notes thereto included elsewhere in this proxy
statement/prospectus.
Chardan
was formed on March 10, 2005 to serve as a vehicle to effect a stock purchase,
capital stock exchange, asset acquisition or other similar business combination
with an unidentified business that has its primary operating facilities located
in the PRC in any city or province north of the Yangtze River. Chardan closed
its initial public offering on August 10, 2005. All activity from March 10,
2005 through August 10, 2005 related to its formation and initial public
offering.
Chardan
incurred a net loss of $101,742 for the year ended December 31, 2005. Chardan’s
total costs and expenses, all of which were related to our formation,
maintenance of our corporate status and efforts to find and evaluate target
businesses, were approximately $454,000, consisting principally of the
following: travel and entertainment expenses, consulting fees, directors and
officers liability insurance, amounts paid to a related party under a monthly
administrative services agreement, professional fees, state franchise taxes
and
miscellaneous expenses. Those expenses were offset by interest income of
approximately $348,000 on the trust fund investments and funds outside the
trust
fund, excluding deferred interest.
Consulting
expenses of $66,700 were paid pursuant to an agreement Chardan entered into
with
Greatace, Ltd., a China-based consulting firm, during the quarter ended
September 30, 2005, to assist in Chardan’s search for prospective target
companies in the northern portion of China. Greatace has also performed due
diligence on prospective target businesses and assisted Chardan in structuring
the business combination with HollySys Holdings. In the event that Chardan
consummates the transaction with HollySys Holidngs, Chardain is obligated to
pay
Greatace an additional $133,300.
Approximately
$29.8 million of the net proceeds of the initial public offering are in
trust, with the remaining net proceeds of approximately $1.1 million
available to pay for business, legal and accounting due diligence on prospective
acquisitions and continuing general and administrative expenses. Chardan will
use substantially all of the net proceeds of its initial public offering not
held in trust to identify and evaluate prospective acquisition candidates,
select the target business, and structure, negotiate and consummate the business
combination. Chardan intends to utilize its cash, including the funds held
in
the trust fund, capital stock, debt or a combination of the foregoing to effect
a business combination. To the extent that its capital stock or debt securities
are used in whole or in part as consideration to effect a business combination,
the proceeds held in the trust fund as well as any other available cash to
finance the operations of the target business
Chardan
intends to utilize its cash, including the funds held in the trust account,
capital stock, debt or a combination of the foregoing to effect a business
combination. Under the agreement governing the proposed transaction, up to
$27,000,000 will be paid at the closing to the HollySys Stockholders to acquire
their shares. The remaining funds in the trust account will be used to finance
the operations of HLS and, if needed, to pay a portion of the deferred purchase
price. Uses of those proceeds will include, among other things, the
following:
|
·
|
Payment
of the accrued expenses of Chardan as of the date of the closing
of the
transaction;
|
|
·
|
To
support internal expansion of HLS’s operations, including increased hiring
expansion of existing facilities or the acquisition or construction
of new
facilities, expenditures to increase the geographic markets within
China
in which HLS operates and expansion of the production and distribution
networks needed to accomplish that geographic market extension;
and
|
|
·
|
To
increase research and development to enable HLS to expand its product
offering, including the development of nuclear power plant automation
and
transportation automation.
|
Chardan
is obligated, commencing
August
2,
2005 to pay to Chardan Ventures, an affiliate of Dr. Richard D. Propper, its
chairman of the board, Jiangnan Huang, a director and chief executive officer
and Zhang Li, a director and chief financial officer, a monthly fee of $7,500
for general and administrative services.
In
connection with its initial public offering, Chardan issued an option for $100
to the representative of the underwriters to purchase 250,000 units at an
exercise price of $7.50 per unit. Chardan has accounted for the fair value
of
the option, inclusive of the receipt of the $100 cash payment, as an expense
of
the public offering resulting in a charge directly to stockholders’ equity.
Chardan estimates that the fair value of this option is approximately $550,000
($2.20 per unit) using a Black-Scholes option-pricing model. The fair value
of
the option granted to the representative is estimated as of the date of grant
using the following assumptions: (1) expected volatility of 44.5%, (2) risk-free
interest rate of 3.8% and (3) expected life of five years. The option may be
exercised for cash or on a “cashless” basis at the holder’s option such that the
holder may use the appreciated value of the option (the difference between
the
exercise prices of the option and the underlying warrants and the market price
of the units and underlying securities) to exercise the option without the
payment of any cash. In addition, the warrants underlying such Units are
exercisable at $6.65 per share.
Off-Balance
Sheet Arrangements
Warrants
and representative's unit purchase option issued in conjuction with our initial
public offering are equity linked derivatives and accordingly represent off
balance sheet arrangements. In addition, the conversion feature of the
representative's unit purchase option constitutes an embedded derivative.
The warrants, unit purchase option and conversion feature meet the scope
exception in paragraph 11(a) of FAS 133 and are accordingly not accounted
for as
derivatives for purposes of FAS 133, but instead are accounted for as
equity. See footnote 5 of the financial statements for more
information.
PRO
FORMA
UNAUDITED
PRO FORMA COMBINED FINANCIAL STATEMENTS
Pursuant
to a stock purchase agreement dated February 2, 2006 (the “Stock Purchase
Transaction”), Chardan North China Acquisition Corporation (“Chardan”) agreed to
purchase 100% of the interest of Gifted Time Holdings Limited (“HollySys
Holdings”) in exchange for consideration including cash of $30 million and 23.5
million shares of HLS Systems International Limited (“HLS”), a subsidiary of
Chardan that will merge with Chardan with HLS as the surviving entity (the
“Chardan Merger”). Each share of common stock of Chardan will automatically
convert into one share of common stock of HLS. The 23.5 million shares of HLS
will represent not less than 77% of total outstanding shares following the
Chardan Merger if all of the existing shareholders of Chardan approve the stock
purchase transaction and no warrants are exercised. If all of the existing
shareholders of Chardan exercise their warrants and no shareholder redeems
his
or her shares into cash, then the 23.5 million shares to be issued to the
shareholders of HollySys Holdings will represent no less than 54.9% of the
outstanding shares of HLS following the Chardan Merger.
The
Stock
Purchase Transaction will result in the shareholders of HollySys Holdings
obtaining a majority of the voting interest in HLS. Generally accepted
accounting principles require that the company whose shareholders retain the
majority voting interest in a combined business be treated as the acquirer
for
accounting purposes. Because Chardan does not have any assets with operating
substance except cash, the Stock Purchase Transaction has been accounted for
as
a reorganization and recapitalization of HollySys Holdings with a carry-over
basis. The cash payment of $30 million to the shareholders of HollySys Holdings
has been accounted for as a capital distribution.
The
following unaudited pro forma combined financial statements give effect to
the
Stock Purchase Trransaction based on the assumptions and adjustments set forth
in the accompanying notes, which management believes is reasonable. The
following unaudited pro forma financial statements and accompanying notes should
be read in conjunction with the audited historical financial statements and
related notes of Chardan from Chardan’s inception (March 5, 2005) to December
31, 2005 and HollySys Holdings, which are included in this
document.
The
following unaudited pro forma balance sheet combines the financial position
of
HollySys Holdings and Chardan as of December 31, 2005 as if the Stock Purchase
Transaction occurred on December 31, 2005. The following unaudited pro forma
combined income statements give effect to the reorganization and
recapitalization transaction of HollySys Holdings assuming that the
reorganization and recapitalization transaction took place on January 1, 2005.
The
following unaudited pro forma combined financial statements have been prepared
using two different levels of approval of the Stock Purchase Transaction by
the
Chardan stockholders, as follows:
|
·
|
Maximum
Approval: This presentation assumes that 100% of Chardan stockholders
approve the Stock Purchase Transaction;
and
|
|
·
|
Minimal
Approval: This presentation assumes that only 80.01% of Chardan
stockholders approve the Stock Purchase Transaction. (Accordingly,
1,149,425 shares were assumed to be redeemable upon voting against
approing the contemplated Stock Purchase Transaction,a nd the amount
of
$5,964,017 was set aside for possible
redemption).
|
The
unaudited pro forma combined financial information is presented for illustrative
purposes only and is not necessarily indicative of the operation results that
would have actually achieved if the Stock Purchase Transaction had consummated
as of the beginning of the period indicated, nor is it necessarily indicative
of
the future operating results of the combined business.
Pro
Forma Assumption and Adjustments:
|
(a)
|
to
record the release of funds held in trust by
CNCAC.
|
|
(b)
|
to
record the cash portion of the purchase price, including the initial
cash
payment, and the accrual of the remaining payment for an aggregate
of
$30,000,000.
|
|
(c)
|
to
record an estimated reduction in interest income due to payment of
the
cash portion of the purchase price.
|
|
(d)
|
assuming
maximum approval, to reclassify common stock held in trust to permanent
equity and to record related deferred interest as
income.
|
|
(e)
|
assuming
minimum approval, to record the refund of funds to dissenting
shareholders.
|
|
(f)
|
to
record the stock portion of the purchase price, the issuance of 23,500,000
shares of Chardan common stock for all the shares of Gifted Time
Holdings
Limited.
|
|
(g)
|
to
eliminate the accumulated deficit (as adjusted when assuming maximum
approval) of Chardan, as Gifted Time Holdings Limited will be the
continuing entity for accounting
purposes.
|
Pro
forma
net income per share was calculated by dividing pro forma net income by the
weighted average number of shares outstanding as follows:
|
Year
Ended
December
31, 2005
|
|||||||
|
Maximum
Approval
(100%)
|
Minimum
Approval
(80.01%)
|
||||||
|
Shares
issued in the Transaction
|
23,500,000
|
23,500,000
|
|||||
|
Weighted
average shares outstanding in Chardan
|
4,020,202
|
3,466,438
|
|||||
|
Incremental
shares relating to warrants exercised
|
630,435
|
630,435
|
|||||
|
Weighted
average common shares - diluted
|
28,150,637
|
27,596,873
|
|||||
THE
SHARES UNDERLYING THE UNDERWRITER’S PURCHASE OPTION HAVE NOT BEEN CONSIDERED
SINCE THE RELATED EXERCISE PRICE IS IN EXCESS OF THE AVERAGE MARKET PRICE DURING
THE PERIOD. THERE ARE NO OTHER DILUTED INSTRUMENTS IN CHARDAN.
HLS
SYSTEMS INTERNATIONAL LIMITED
(Formerly
Chardan North China Acquisition Corporation and Successor of Gifted Time
Holdings Limited)
Pro
Forma Combined Balance Sheet (Maximum Approval Assumption)
At
December 31, 2005
HLS
SYSTEMS INTERNATIONAL LIMITED
(Formerly
Chardan North China Acquisition Corporation and Successor of Gifted Time
Holdings Limited)
Pro
Forma Combined Balance Sheet (Maximum Approval Assumption)
At
December 31, 2005
|
HollySys
Holdings
|
Chardan
|
Pro
Forma
Adjustments
|
Pro
Forma
Combined
|
|||||||||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
|
Common
stock subject to redemption
|
-
|
5,964,017
|
(5,964,017
|
)
|
(c1
)
|
|
-
|
|||||||||
|
Minority
interest
|
8,705,593
|
-
|
-
|
8,705,593
|
||||||||||||
|
|
||||||||||||||||
|
Stockholders’
equity:
|
||||||||||||||||
|
Common
stock
|
50,000
|
700
|
(47,650
|
)
|
(d
)
|
|
3,050
|
|||||||||
|
Additional
paid-in capital
|
11,950,516
|
25,006,126
|
(30,000,000
|
)
|
(b
)
|
|
12,952,962
|
|||||||||
|
47,650
|
(d
)
|
|
||||||||||||||
|
5,964,017
|
(c1
)
|
|
||||||||||||||
|
(15,347
|
)
|
(e
)
|
|
|||||||||||||
|
Appropriated
earnings
|
3,296,008
|
-
|
-
|
|
3,296,008
|
|||||||||||
|
Retained
earnings
|
20,715,881
|
(101,742
|
)
|
86,395
|
(c1
)
|
|
20,715,881
|
|||||||||
|
15,347
|
|
|||||||||||||||
|
Cumulative
translation adjustments
|
796,538
|
-
|
-
|
(e
)
|
|
796,538
|
||||||||||
|
Total
stockholders’ equity
|
36,808,943
|
24,905,084
|
(23,949,588
|
)
|
37,764,439
|
|||||||||||
|
Total
liabilities and stockholders' equity
|
$
|
110,651,178
|
$
|
31,353,114
|
$
|
(27,173,907
|
)
|
$
|
114,830,385
|
|||||||
HLS
SYSTEMS INTERNATIONAL LIMITED
(Formerly
Chardan North China Acquisition Corporation and Successor of Gifted Time
Holdings Limited)
Pro
Forma Combined Balance Sheet (Minimum Approval Assumption)
At
December 31, 2005
HLS
SYSTEMS INTERNATIONAL LIMITED
(Formerly
Chardan North China Acquisition Corporation and Successor of Gifted Time
Holdings Limited)
Pro
Forma Combined Balance Sheet (Minimum Approval Assumption)
At
December 31, 2005
|
HollySys
Holdings
|
Chardan
|
Pro
Forma
Adjustments
|
Pro
Forma
Combined
|
|||||||||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
|
Common
stock subject to redemption
|
-
|
5,964,017
|
(5,964,017
|
)
|
(c2
)
|
|
-
|
|||||||||
|
Minority
interest
|
8,705,593
|
-
|
-
|
8,705,593
|
||||||||||||
|
|
||||||||||||||||
|
Stockholders’
equity:
|
||||||||||||||||
|
Common
stock
|
50,000
|
700
|
(47,650
|
)
|
(d
)
|
|
2,935
|
|||||||||
|
(115
|
)
|
(c2
)
|
|
|||||||||||||
|
Additional
paid-in capital
|
11,950,516
|
25,006,126
|
(30,000,000
|
)
|
(b
)
|
|
6,902,665
|
|||||||||
|
47,650
|
(d
)
|
|
||||||||||||||
|
(101,742
|
)
|
(e
)
|
|
|||||||||||||
|
115
|
(c2
)
|
|
||||||||||||||
|
Appropriated
earnings
|
3,296,008
|
-
|
-
|
|
3,296,008
|
|||||||||||
|
Retained
earnings (accumulated deficit)
|
20,715,881
|
(101,742
|
)
|
101,742
|
(e
)
|
|
20,715,881
|
|||||||||
|
Cumulative
translation adjustments
|
796,538
|
-
|
-
|
796,538
|
||||||||||||
|
Total
stockholders’ equity
|
36,808,943
|
24,905,084
|
(30,000,000
|
)
|
31,714,027
|
|||||||||||
|
Total
liabilities and stockholders' equity
|
$
|
110,651,178
|
$
|
31,353,114
|
$
|
(29,191,555
|
)
|
$
|
112,812,737
|
|||||||
HLS
SYSTEMS INTERNATIONAL LIMITED
(Formerly
Chardan North China Acquisition Corporation and Successor of Gifted Time
Holdings Limited)
Pro
Forma Combined Statement of Income (Maximum Approval
Assumption)
Year
Ended December 31, 2005
|
HollySys
Holdings
|
Chardan
|
Pro
Forma
Adjustments
|
Pro
Forma
Combined
|
|||||||||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Integrated
contract revenue
|
$
|
83,008,197
|
$
|
-
|
$
|
-
|
$
|
83,008,197
|
||||||||
|
Products
sales
|
5,463,880
|
-
|
-
|
5,463,880
|
||||||||||||
|
Total
revenues
|
88,472,077
|
-
|
-
|
88,472,077
|
||||||||||||
|
Cost
of integrated contracts
|
56,713,618
|
-
|
-
|
56,713,618
|
||||||||||||
|
Cost
of products sold
|
3,815,504
|
-
|
-
|
3,815,504
|
||||||||||||
|
Gross
profit
|
27,942,955
|
-
|
-
|
27,942,955
|
||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling
and marketing expenses
|
5,980,479
|
-
|
-
|
5,980,479
|
||||||||||||
|
General
and administrative
|
6,131,460
|
453,863
|
-
|
6,585,323
|
||||||||||||
|
Research
and development
|
202,344
|
-
|
-
|
202,344
|
||||||||||||
|
Loss
on disposal of assets
|
41,217
|
-
|
-
|
41,217
|
||||||||||||
|
Total
operating expenses
|
12,335,500
|
453,863
|
-
|
12,768,146
|
||||||||||||
|
Income
from operations
|
15,587,445
|
(453,863
|
)
|
-
|
15,133,592
|
|||||||||||
|
Interest
expense
|
(939,106
|
)
|
-
|
-
|
(939,106
|
)
|
||||||||||
|
Other
income (expenses)
|
29,062
|
-
|
-
|
29,062
|
||||||||||||
|
Investment
income
|
643,277
|
347,871
|
(389,966
|
)
|
(b1
)
|
|
687,577
|
|||||||||
|
86,395
|
(c1
)
|
|
||||||||||||||
|
Subsidy
income
|
3,205,736
|
-
|
-
|
3,205,736
|
||||||||||||
|
Income
before income taxes
and
minority interest
|
18,526,414
|
(105,992
|
)
|
(303,571
|
)
|
18,116,861
|
||||||||||
|
Income
taxes
|
480,786
|
(4,250
|
)
|
-
|
476,536
|
|||||||||||
|
Income
(loss) before minority interests
|
18,045,628
|
(101,742
|
)
|
(303,571
|
)
|
17,640,325
|
||||||||||
|
Minority
interest
|
(2,918,689
|
)
|
-
|
-
|
(2,918,689
|
)
|
||||||||||
|
Net
income (loss)
|
$
|
15,126,939
|
$
|
(101,742
|
)
|
$
|
(303,571
|
)
|
$
|
14,721,636
|
||||||
|
Weighted
average common shares
outstanding
- basic
|
4,020,202
|
23,500,000
|
(f
)
|
|
27,520,202
|
|||||||||||
|
Net
income (loss) per share
|
(0.03
|
)
|
0.53
|
|||||||||||||
|
Weighted
average common shares
outstanding
- diluted
|
4,650,637
|
23,500,000
|
(f
)
|
|
28,150,637
|
|||||||||||
|
Net
income (loss) per share
|
0.52
|
|||||||||||||||
HLS
SYSTEMS INTERNATIONAL LIMITED
(Formerly
Chardan North China Acquisition Corporation and Successor of Gifted Time
Holdings Limited)
Pro
Forma Combined Statement of Income (Minimum Approval
Assumption)
Year
Ended December 31, 2005
|
HollySys
Holdings
|
Chardan
|
Pro
Forma
Adjustments
|
Pro
Forma
Combined
|
|||||||||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Integrated
contract revenue
|
$
|
83,008,197
|
$
|
-
|
$
|
-
|
$
|
83,008,197
|
||||||||
|
Products
sales
|
5,463,880
|
-
|
-
|
5,463,880
|
||||||||||||
|
Total
revenues
|
88,472,077
|
-
|
-
|
88,472,077
|
||||||||||||
|
Cost
of integrated contracts
|
56,713,618
|
-
|
-
|
56,713,618
|
||||||||||||
|
Cost
of products sold
|
3,815,504
|
-
|
-
|
3,815,504
|
||||||||||||
|
Gross
profit
|
27,952,955
|
-
|
-
|
27,952,955
|
||||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling
and marketing expenses
|
5,980,479
|
-
|
-
|
5,980,479
|
||||||||||||
|
General
and administrative
|
6,131,460
|
453,863
|
-
|
7,585,323
|
||||||||||||
|
Research
and development
|
202,344
|
-
|
-
|
202,344
|
||||||||||||
|
Loss
on disposal of assets
|
41,217
|
-
|
-
|
41,217
|
||||||||||||
|
Total
operating expenses
|
12,355,500
|
453,863
|
-
|
12,768,146
|
||||||||||||
|
Income
from operations
|
15,587,445
|
(453,863
|
)
|
-
|
15,133,592
|
|||||||||||
|
Interest
expense
|
(939,106
|
)
|
-
|
-
|
(939,106
|
)
|
||||||||||
|
Other
income (expenses)
|
29,062
|
-
|
-
|
29,062
|
||||||||||||
|
Investment
income
|
643,277
|
347,871
|
(332,526
|
)
|
(b1
)
|
|
658,622
|
|||||||||
|
Subsidy
income
|
3,205,736
|
-
|
-
|
3,205,736
|
||||||||||||
|
Income
before income taxes
and
minority interest
|
18,526,414
|
(105,992
|
)
|
(303,572
|
)
|
18,087,906
|
||||||||||
|
Income
taxes
|
480,786
|
(4,250
|
)
|
-
|
476,537
|
|||||||||||
|
Income
(loss) before minority interests
|
18,045,628
|
(101,742
|
)
|
(303,572
|
)
|
17,611,370
|
||||||||||
|
Minority
interest
|
(2,918,689
|
)
|
-
|
-
|
(2,918,689
|
)
|
||||||||||
|
Net
income (loss)
|
$
|
15,126,939
|
$
|
(101,742
|
)
|
$
|
(303,572
|
)
|
$
|
14,692,681
|
||||||
|
Weighted
average common shares
outstanding
- basic
|
3,466,438
|
23,500,000
|
(f
)
|
|
26,966,438
|
|||||||||||
|
Net
income (loss) per share
|
(0.03
|
)
|
0.54
|
|||||||||||||
|
Weighted
average common shares
outstanding
- diluted
|
4,096,873
|
23,500,000
|
27,596,873
|
|||||||||||||
|
Net
income (loss) per share
|
0.53
|
|||||||||||||||
DIRECTORS
AND MANAGEMENT
Directors
and Management Following the Stock Purchase
At
the
effective time of the stock purchase, the board of directors, executive officers
and key employees of HLS will be as follows:
|
Name
|
Age
|
Position
|
|||
|
Qiao
Li
|
49
|
Chairperson
of the Board
|
|||
|
Wang
Changli
|
43
|
Director
and Chief Executive Officer
|
|||
|
Sun
Dongying
|
36
|
Director
|
|||
|
Kerry
S. Propper
|
30
|
Director
|
The
directors will serve for a term of one year, and the employment agreements
for
Dr. Wang as Chief Executive Officer and Madame Qiao Li as Chairperson are for
a
term of three years.
Madame
Qiao Li
will be
the Chairperson of HLS. Madame Qiao has been the Chairperson of Beijing HollySys
since 1999. Madame Qiao also currently is the Chairperson of Beijing Good To
Great Investment Co., Ltd. Madame Qiao served as the Vice-President of Beijing
Venture Capital Co., Ltd. from 1999 to 2000. Madame Qiao received her Bachelor’s
degree from Capital Normal University and has a Master’s degree in Business
Administration from Capital University of Economics and Business.
Dr.
Wang Changli
will be
a director and Chief Executive Officer of HLS. Dr. Wang has been the Chief
Executive Officer and Vice Chairman of Beijing HollySys Co., Ltd. since 1999.
Prior to joining Beijing HollySys Co., Ltd., Dr. Wang worked for the No. 6
Institute of Electronic Industry Department. Dr. Wang also has been the Vice
Chairman of the Chinese Automation Association since 2003. Dr. Wang received
his
BSc in Automation from Tianjin University in 1984 and his PhD in Automation
from
Lancaster University in 1988.
Mr.
Sun Dongying
will be
a director of HLS. Mr. Sun has been an Executive Partner of Guan Tao Law Firm
since March 2000. Mr. Sun served as the Legal Consultant of the China
Machine-Building International Corporation from June 1994 to February 2000.
Mr.
Sun received a Bachelor’s degree of Law with a major in International Economic
Law from China University of Political Science and Law in 1994 and an LLM from
Chicago-Kent College of Law, Illinois Institute of Technology in
2004.
Kerry
S. Propper
will be
a continuing director of HLS, the successor to Chardan. He was a founder and
has
been the executive vice president and a director of Chardan since its inception
in March 2005. Mr. Propper is the chief executive officer and a director of
Chardan South China Acquisition Corporation, a blank check company organized
to
locate and consummate a business combination in the PRC. Mr. Propper is also
a
principal and CEO of Chardan Capital Markets, LLC, a broker dealer, which he
founded with Steven Urbach in February 2003. Mr. Propper has been the owner
and
chief executive officer of The Gramercy Group LLC, a New York based
broker/dealer, since July 2003. From February 1999 until March 2003 Mr. Propper
was a founder, owner and managing director of Windsor Capital Advisors, LLC,
an
investment advisory and investment banking firm located in New York. Mr. Propper
also founded The Private Capital Group LLC, a small private investment firm
specializing in loans and convertible preferred debt and equity offerings for
small public companies, in May 2000 and was affiliated with it until December
2003. From July 1997 until February 1999, Mr. Proper served as a senior trader
of Aegis Capital Corp, a broker dealer and member firm of the NASD. Mr. Propper
is also currently serving as a board member of Source Atlantic, Inc., a Boston
based health care technology company.
Meetings
and Committees of the Board of Directors of Chardan
During
the fiscal year ended December 31, 2005, Chardan’s board of directors did
not hold any meetings. Although Chardan does not have any formal policy
regarding director attendance at annual stockholder meetings, Chardan attempts
to schedule its annual meetings so that all of its directors can attend. In
addition, Chardan expects its directors to attend all board and committee
meetings and to spend the time needed and meet as frequently as necessary to
properly discharge their responsibilities.
Independence
of Directors
In
anticipation of being listed on the Nasdaq National Market, HLS will elect
to
follow the rules of Nasdaq in determining whether a director is independent.
The
board of directors of HLS also will consult with the Company’s counsel to ensure
that the board’s determinations are consistent with those rules and all relevant
securities and other laws and regulations regarding the independence of
directors. The Nasdaq listing standards define an “independent director”
generally as a person, other than an officer of the company, who does not have
a
relationship with the company that would interfere with the director’s exercise
of independent judgment. Consistent with these considerations, the board of
directors of HLS will include five independent directors. The other directors
are not independent.
Chardan
currently does not have an independent board of directors and is not required
to
have one.
Audit
Committee
In
anticipation of being listed on the Nasdaq National Market, HLS will establish
an audit committee to be effective at the consummation of the stock purchase.
As
required by Nasdaq listing standards, the audit committee will be comprised
of
at least three independent directors who are also “financially literate.” The
listing standards define “financially literate” as being able to read and
understand fundamental financial statements, including a company’s balance
sheet, income statement and cash flow statement. The Each audit committee member
will have an understanding of generally accepted accounting principles and
financial statements, the ability to assess the general application of such
principles in connection with the company’s financial statements, including
estimates, accruals and reserves, experience in analyzing or evaluating
financial statements of similar breadth and complexity as the company’s
financial statements, an understanding of internal controls and procedures
for
financial reporting and an understanding of audit committee
functions.
Audit
Committee Financial Expert
The
board
of directors will identify a director of HLS who will qualify as an “audit
committee financial expert” within the meaning of all applicable rules.
Current
Chardan Board of Directors
Because
Chardan does not have any “independent” directors, the entire Board of Directors
of Chardan has acted as the Audit Committee.
Independent
Auditors ’ Fees
Goldstein
Golub Kessler LLP (“GGK”) acts as Chardan’s principal accountant. Through
September 30, 2005, GGK had a continuing relationship with American Express
Tax
and Business Services Inc. (TBS), from which it leased auditing staff who were
full time, permanent employees of TBS and through which its partners provide
non-audit services. Subsequent to September 30, 2005, this relationship
ceased and the firm established a similar relationship with RSM McGladrey,
Inc.
(RSM). GGK has no full time employees and therefore, none of the audit services
performed were provided by permanent full-time employees of GGK. GGK manages
and
supervises the audit and audit staff, and is exclusively responsible for the
opinion rendered in connection with its examination. The following is a summary
of fees paid to GGK and TBS for services rendered.
Audit
Fees
During
the fiscal year ended December 31, 2005, Chardan paid, or expects to pay,
Chardan’s principal accountant $29,000 for the services they performed in
connection with the initial public offering, including the financial statements
included in the Current Report on Form 8-K filed with the Securities and
Exchange Commission on August 31, 2005, $5,000 in connection with the review
of
the Quarterly Report on Form 10-QSB, and approximately $15,000 in connection
with the December 31, 2005 audit and Form 10-KSB.
Audit-Related
Fees
During
2005, Chardan’s principal accountant did not render assurance and related
services reasonably related to the performance of the audit or review of
financial statements.
Tax
Fees
During
2005, Chardan did not make any payments for tax services.
All
Other Fees
During
2005, there were no fees billed for products and services provided by the
principal accountant to Chardan other than those set forth above.
Audit
Committee Pre-Approval Policies and Procedures
In
accordance with Section 10A(i) of the Securities Exchange Act of 1934, before
the company engages its independent accountant to render audit or permitted
non-audit services, the engagement will be approved by the audit
committee.
Code
of Ethics
In
anticipation of the stock purchase, the board of directors of HLS will adopt
a
Code of Ethics that applies to HLS’s directors, officers and employees as well
as those of its subsidiaries. A copy of the form of HLS’s Code of Ethics has
been filed as an annex to this proxy statement. Requests for copies of HLS’s
code of ethics should be sent in writing to Chardan North China Acquisition
Corporation, 625 Broadway, Suite 111, San Diego, California 92101, Attention:
Secretary.
Chardan
has not yet adopted a formal code of ethics statement because the board of
directors evaluated the business of the company and the number of employees
and
determined that since the business is largely limited to maintaining its cash
investments while its searches for a target company and consummates an
acquisition and the only persons acting for Chardan are the five directors
who
are also the officers, general rules of fiduciary duty and federal and state
securities laws are adequate ethical guidelines.
Stock
Option Committee Information
Upon
consummation of the stock purchase, the board of directors of HLS will establish
a compensation committee. The purpose of the compensation committee will be
to
administer the company’s equity plans, including authority to make and modify
awards under such plans. Initially, the plan will be the Chardan 2006 Equity
Plan, as assumed by HLS. Since the plan has not yet been approved, the
compensation committee has not had any meetings and no options or other awards
have been granted under the plan.
Nominating
Committee Information
In
anticipation of being listed on the Nasdaq National Market, HLS will form a
nominating committee in connection with the consummation of the stock purchase.
The members each will be an independent director under Nasdaq listing standards.
The nominating committee will be responsible for overseeing the selection of
persons to be nominated to serve on HLS’s board of directors. The nominating
committee will consider persons identified by its members, management,
stockholders, investment bankers and others. A copy of the form of nominating
committee charter is attached as an annex to this proxy statement.
Chardan
does not have any restrictions on stockholder nominations under its certificate
of incorporation or by-laws. The only restrictions are those applicable
generally under Delaware corporate law and the federal proxy rules. Prior to
the
consummation of the stock purchase agreement, Chardan has not had a nominating
committee or a formal means by which stockholders can nominate a director for
election. Currently the entire board of directors decides on nominees, on the
recommendation of one or more members of the board. None of the members of
the
board of directors are “independent.” Currently, the board of directors will
consider suggestions from individual stockholders, subject to evaluation of
the
person’s merits. Stockholders may communicate nominee suggestions directly to
any of the board members, accompanied by biographical details and a statement
of
support for the nominees. The suggested nominee must also provide a statement
of
consent to being considered for nomination. Although there are no formal
criteria for nominees, the board of directors believes that persons should
be
actively engaged in business endeavors, have a financial background, and be
familiar with acquisition strategies and money management.
Because
the management and directors of Chardan are the same persons, the board of
directors has determined not to adopt a formal methodology for communications
from stockholders on the belief that any communication would be brought to
the
boards’ attention by virtue of the co-extensive employment.
Director
Compensation
HLS
intends to pay its non-employee directors for each board meeting that they
attend, reimburse their expenses incurred in attending meetings and award
options to purchase shares of common stock to be issued on election, exercisable
at the market price of the common stock on the date of issuance, vesting
immediately and exercisable for five years. The options will be issued under
the
stock option plan approved by the board of directors and stockholders pursuant
to this proxy statement and the underlying common stock will be registered
for
issuance upon exercise. The amounts of compensation and numbers of shares
subject to options have not been determined.
Chardan’s
directors do not currently receive any cash compensation for their service
as
members of the board of directors.
Executive
Compensation
Dr. Wang
Changli and Madame Qiao Li will enter into employment agreements with HollySys
Holdings, effective as of the effective time of the Redomestication Merger.
Dr. Wang will be employed as the chief executive officer and Madame Qiao
will serve as chairperson. The agreements will provide for an annual salary
and
a discretionary cash bonus based on performance of HollySys and other criteria,
as the compensation committee determines. The executives will be entitled to
insurance benefits, five weeks vacation, a car and reimbursement of business
expenses and, if necessary, relocation expenses. The agreements will be
terminable by HollySys Operating Company for death, disability and cause. The
executive may terminate for good reason, which includes HollySys Operating
Company’s breach, the executive not being a member of the board of directors,
and change of control. In the event of termination for good reason, the
executive will receive two years compensation and benefits. The agreements
contain provisions for the protection of confidential information and a
three-year-after employment non-competition period within China. In the purchase
agreement, there is an additional non-competition agreement applicable to these
persons for the greater of five years after consummation or two years after
employment that includes Hong Kong and Taiwan, in addition to
China.
HollySys’
Executive Officers
The
following sets forth summary information concerning the compensation paid by
the
HollySys Operating Companies to Dr. Wang and Madame Qiao and during the last
three fiscal years.
|
Annual
Compensation
|
||||||||||
|
Name
|
Year
|
Salary
($)
|
Bonus
($)
|
|||||||
|
Wang
Changli
|
2005
2004
2003
|
62,500
62,500
62,500
|
165,912
228,638
8,551
|
|||||||
|
Qiao
Li
|
2005
2004
2003
|
0
0
0
|
0
0
0
|
|||||||
Since
its
formation, neither HollySys Holdings nor any of the HollySys Operating Companies
has granted any stock options or stock appreciation rights, any awards under
long-term incentive plans, or any other non-cash compensation.
Chardan
Executive Officers
No
executive officer of Chardan has received any cash or non-cash compensation
for
services rendered to Chardan. Each executive officer has agreed not to take
any
compensation prior to the consummation of a business combination.
Commencing
August 2, 2005 and ending upon the acquisition of a target business,
Chardan has paid and will continue to pay an administrative services fee
totaling $7,500 per month to Chardan Capital, LLC for providing Chardan with
office space and certain office and secretarial services. Other than this $7,500
per month in fees, no compensation of any kind, including finders and consulting
fees, has been or will be paid to any of the Chardan stockholders existing
prior
to its initial public offering, or any of their respective affiliates, for
services rendered prior to or in connection with a business combination.
However, Chardan stockholders existing prior to its initial public offering
have
been and will continue to be reimbursed for any out-of-pocket expenses incurred
in connection with activities on our behalf, such as identifying potential
target businesses and performing due diligence on suitable business
combinations.
Executive
Compensation Determination
It
is the
intention of HLS to determine executive compensation by a decision of the
majority of the independent directors, at a meeting at which the chief executive
officer will not be present. In the future, the board may establish a committee.
At this time, HLS does not believe a separate committee is necessary because
the
senior executives of the company are employed under written compensation
agreements and the Stock Purchase Agreement provides for equity-based incentive
compensation, all of which agreements were negotiated by the Chardan board
of
directors in arms-length negotiations.
Key
Employee Compensation
Chardan
Capital LLC, an affiliate of Chardan, and Chardan Capital Markets LLC will
provide a variety of ongoing services to HollySys on a month-to-month basis,
terminable at will without penalty, at a monthly cost to HollySys of
$30,000.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Chardan
In
March
2005, we issued 1,000,000 shares of our common stock to the individuals set
forth below for $25,000 in cash, at a purchase price of $0.025 per share, as
follows:
|
Name
|
Number
of
Shares
|
Relationship
to Us
|
|||||
|
Li
Zhang
|
120,810
|
Chief
Executive Officer and Director
|
|||||
|
Kerry
Propper
|
177,600
|
Chief
Financial Officer, Secretary and Director
|
|||||
|
Jiangnan
Huang
|
120,810
|
Executive
Vice President and Director
|
|||||
|
Chardan
Capital Partners
|
508,380
|
Stockholder
|
|||||
|
SUJG,
Inc.
|
72,400
|
Stockholder
|
|||||
Effective
July 22, 2005, our board of directors authorized a stock dividend of 0.25 shares
of common stock for each outstanding share of common stock, effectively lowering
the purchase price to $0.02 per share. These shares will be held in escrow
until
August 2008.
The
holders of the majority of these shares will be entitled to make up to two
demands that we register these shares pursuant to a registration rights
agreement. The holders of the majority of these shares can elect to exercise
these registration rights at any time commencing three months prior to the
date
on which these shares of common stock are to be released from escrow. In
addition, these stockholders have certain “piggy-back” registration rights with
respect to registration statements filed subsequent to the date on which these
shares of common stock are released from escrow. Chardan will bear the expenses
incurred in connection with the filing of any such registration
statements.
Chardan’s
directors and several individuals affiliated with companies they are associated
with have entered into letter agreements with the representative of the
underwriters pursuant to which they agreed to purchase up to 1,000,000 warrants
at prices not to exceed $0.75 per warrant during the 40-trading day period
following separate trading of the warrants. Chardan has agreed that these
warrants shall not be redeemable as long as such warrants continue to be held
by
such individuals or their affiliates. Because these individuals may be insiders,
or affiliates of insiders, at the time of the redemption call, their ability
to
sell securities in the open market will be significantly limited. At such time,
Chardan expects to have policies in place that prohibit insiders from selling
its securities except during specific periods of time. Accordingly, unlike
public stockholders who could, if Chardan called the warrants for redemption,
either sell their warrants or exercise such warrants and sell the shares of
common stock received upon such exercise freely in the open market, the insiders
would be significantly restricted from selling such securities. Additionally,
even if the insiders could sell their securities, any sale by an insider would
require him to file a Form 4 disclosing his sale and that would have a
depressive effect on the price of Chardan’s stock during the redemption period.
As a result, Chardan believes this non-call feature is appropriate.
Chardan
Capital, LLC, an affiliate of Dr. Richard D. Propper, Li Zhang and Jiangnan
Huang, has agreed that, commencing on the effective date of this prospectus
through the acquisition of a target business, it will make available to Chardan
a small amount of office space and certain office and secretarial services,
as
we may require from time to time. Chardan has agreed to pay Chardan Capital,
LLC
$7,500 per month for these services. Dr. Propper is president, a manager and
19.8% owner of Chardan Capital, LLC. Each of Li Zhang and Jiangnan Huang is
a
manager and 16.1% owner of Chardan Capital, LLC. As a result, they will benefit
from the transactions to the extent of their interest in Chardan Capital, LLC.
However, these arrangements are solely for the benefit of Chardan and are not
intended to provide Dr. Propper and Messrs. Zhang and Huang compensation in
lieu
of a salary. Chardan believes, based on rents and fees for similar services
in
the San Diego metropolitan area, that the fee charged by Chardan Capital, LLC
is
at least as favorable as Chardan could have obtained from an unaffiliated
person. However, as Chardan’s directors may not be deemed “independent,” Chardan
did not have the benefit of disinterested directors approving this
transaction.
Kerry
Propper advanced to Chardan $20,000 and Chardan Capital Partners advanced to
Chardon $60,000 to cover expenses related to Chardan’s initial public offering.
The loans were repaid without interest.
Chardan
will reimburse its officers and directors for any reasonable out-of-pocket
business expenses incurred by them in connection with certain activities on
Chardan’s behalf, such as identifying and investigating possible target
businesses and business combinations. There is no limit on the amount of
out-of-pocket expenses reimbursable by Chardan, which will be reviewed only
by
Chardan’s board or a court of competent jurisdiction if such reimbursement is
challenged.
Other
than the $7,500 per-month administrative fee and reimbursable out-of-pocket
expenses payable to Chardan’s officers and directors, no compensation or fees of
any kind, including finders and consulting fees, will be paid to any of
Chardan’s existing stockholders, officers or directors who owned Chardan’s
common stock prior to its initial public offering, or to any of their respective
affiliates, for services rendered to Chardan prior to or with respect to the
business combination.
After
completion of the stock purchase, Chardan Capital, LLC, an affiliate of Dr.
Propper, Mr. Zhang and Mr. Huang, and Chardan Capital Markets LLC will provide
a
variety of ongoing services to HLS at a cost to HLS of $30,000 per month on
a
month-to-month basis, terminable by HLS without penalty. The services will
be on
a non-exclusive basis and will include advice and help in meeting US public
reporting requirements and accounting standards, Sarbanes-Oxley compliance,
corporate structuring and development, stockholder relations, corporate finance
and operational capitalization, transfer agent matters and such other similar
services as requested and agreed to by Chardan Capital, LLC.
Dr.
Richard Propper is the father of Mr. Kerry Propper.
All
ongoing and future transactions between Chardan and any of its officers and
directors or their respective affiliates, including loans by its officers and
directors, will require prior approval in each instance by a majority of
Chardan’s uninterested “independent” directors (to the extent it has any) or the
members of its board who do not have an interest in the transaction. These
directors, if they determine to be necessary or appropriate, will have access,
at Chardan’s expense, to Chardan’s attorneys or independent legal counsel.
Chardan will not enter into any such transaction unless its disinterested
“independent” directors (or, if there are no “independent” directors, its
disinterested directors) determine that the terms of such transaction are no
less favorable to Chardan than those that would be available to it with respect
to such a transaction, from unaffiliated third parties.
HollySys
As
a
public company, HLS, neither directly nor indirectly nor through any subsidiary,
will make loans, extend credit, maintain credit or arrange for the extension
of
credit or renew an extension of credit in the form of a personal loan to or
for
any director or executive officer of the company. This prohibition is in
compliance with the provisions of the Sarbanes-Oxley Act of 2002. Moreover,
Chardan and HLS have adopted an audit committee charter that requires the audit
committee to review and approve all related party transactions, assure
compliance with the company’s code of ethics, and monitor and discuss with the
auditors and outside counsel policies and compliance with applicable accounting
and legal standards and requirements.
BENEFICIAL
OWNERSHIP OF SECURITIES
Beneficial
Owners of More Than 5% of Chardan Common Stock
Based
upon filings made with the Securities and Exchange Commission under Section
13(d) of the Exchange Act on or before December 31, 2005, Chardan is aware
of
the following beneficial owners of more than 5% of any class of its voting
securities who are not listed in the table below.
|
Name
and Address of
Beneficial
Owner
|
Shares
of Chardan
Common
Stock
|
Approximate
Percentage of
Outstanding
Common Stock(1)
|
|
Richard
D. Propper, M.D. (2)
|
635,474
|
9.1%
|
|
Jeffrey
L. Feinberg (3)
|
600,000
|
8.6%
|
|
Amaranth
Global Equities Master Fund Limited (4)
|
535,000
|
7.6%
|
|
Sapling,
LLC (5)
|
502,500
|
7.2%
|
|
Jack
Silver (6)
|
400,000
|
5.7%
|
|
(1)
|
Beneficial
ownership has been determined in accordance with Rule 13d-3 under
the
Securities Exchange Act of 1934. Unless otherwise noted, we believe
that
all persons named in the table have sole voting and investment power
with
respect to all shares of our common stock beneficially owned by them.
These amounts exclude shares issuable upon exercise of warrants that
are
not exercisable and are not expected to be exercisable within 60
days of
December 31, 2005.
|
| (2) |
The
business address of Dr. Propper is 625 Broadway, Suite 111, San Diego,
California 92101. It does not include 110,000 shares of Common Stock
issuable upon exercise of warrants, which are not currently exercisable
and are not expected to be exercisable within 60 days of December
31,
2005.
|
| (3) |
The
securities reported as held by Mr. Feinberg represent shares of Common
Stock held (i) in a separately managed account managed by Mr. Feinberg
and
(ii) by JLF Partners I, L.P., JLF Partners II, L.P. and JLF Off Shore
Fund, Ltd. to which JLF Asset Management LLC serves as the management
company and sent or investment manager. Jeffrey L. Feinberg is the
managing member of JLF Asset Management, LLC. The business address
of Mr.
Feinberg and these entities is 2775 Via de la Valle, Suite 204, Del
Mar,
California 92014. This information is derived from a Schedule 13d
filed by
the above persons with the SEC on August 17,
2005.
|
| (4) |
Amaranth
Advisors LLC is the trading advisor for Amaranth’s global equities master
fund limited and has been granted investment discretion over portfolio
investments, including the shares of Chardan held by it. Mr. Nicholas
M.
Maounis is the managing member of Amaranth Advisors LLC and may,
by virtue
of his position as managing member, be deemed to have power to direct
the
vote and disposition of the shares of Chardan. The business address
is 1
American Lane, Greenwich, Connecticut 06831. This information is
derived
from a Schedule 13G filed by the above persons with SEC on
August 15, 2005.
|
| (5) |
Represents
shares owned by Sapling, LLC and Fir Tree Recovery Master Fund, L.P.
Fir
Tree Value Master Fund, L.P., a Cayman Islands exempted limited
partnership is the sole member of Sapling and Fir Tree, Inc. a New
York
corporation is the investment manager of both Sapling and Fir Tree
Recovery. The business address of these entities is 535 Fifth Avenue,
31st
Floor, New York, New York 10017. The foregoing information is derived
from
a Schedule 13G filed by such entities with the Securities and Exchange
Commission on September 23, 2005.
|
| (6) |
The
business address of Mr. Silver is c/o Sherleigh Associates LLC, 660
Madison Avenue, New York, New York 10021. These shares include (i)
200,000
shares held by Sherleigh Associates, Inc. profit sharing plan, a
trust of
which Mr. Silver is the trustee, and 200,000 shares held by Sherleigh
Associates, Inc. defined benefit plan. Mr. Silver has the sole voting
and
despositve power with respect to all such shares. The foregoing
information is derived from a Schedule 13G filed with the SEC on
August
18, 2005.
|
None
of
the above stockholders has any voting rights that are different from the voting
rights of any other stockholders.
Security
Ownership of Officers and Directors of Chardan
The
following table sets forth information with respect to the beneficial ownership
of Chardan common shares, as of December 31, 2005 by:
|
·
|
each
director and executive officer; and
|
|
·
|
all
directors and officers as a group.
|
____________________________________
|
(1)
|
Unless
otherwise indicated, the business address of each of the individuals
is
c/o Chardan, 625 Broadway, Suite 1111, San Diego, CA
92101.
|
|
(2)
|
Beneficial
ownership and percentage has been determined in accordance with Rule
13d-3
under the Securities Exchange Act of
1934.
|
|
(3)
|
Represents
shares of common stock held by Chardan Capital Partners. A family
limited
liability company established for the benefit of Dr. Propper’s family owns
approximately 40% of such entity.
|
|
(4)
|
Does
not include the following number of shares of common stock issuable
upon
exercise of warrants (which are not currently exercisable and are
not
expected to be exercisable within 60 days of December 31, 2005):
Dr.
Richard Propper - 110,000 shares; Kerry Propper - 72,500 shares;
Zhang Li
- 37,500 shares; and all directors and officers as a group - 220,000
shares (which were purchased from the public
market).
|
|
(5)
|
Includes
90,500 shares of common stock held by SUJG, Inc. Mr. Propper is a
director
of that entity and controls the voting and disposition of the Chardan
shares held by that entity.
|
Dr.
Richard Propper, Kerry Propper, Jiangnan Huang and Zhang Li are deemed to be
our
“parents” and “promoters,” as these terms are defined under the federal
securities laws.
PRICE
RANGE OF SECURITIES AND DIVIDENDS
Chardan
The
shares of Chardan common stock, warrants and units are currently traded on
the
Over-the-Counter Bulletin Board under the symbols “CNCA,” “CNCAW” and “CNCAU,”
respectively. The closing price for each share of common stock, warrant and
unit
of Chardan on February 1, 2006, was $6.78, $2.82 and $12.25, respectively.
Chardan units commenced public trading on August 3, 2005 and common stock and
warrants commenced public trading on August 31, 2005.
The
table
below sets forth, for the calendar quarters indicated, the high and low bid
prices of the Chardan common stock, warrants and units as reported on the
Over-the-Counter Bulletin Board. The over-the-counter market quotations reported
below reflect inter-dealer prices, without markup, markdown or commissions
and
may not represent actual transactions.
|
Over-the-Counter
Bulletin Board
|
|||||||||||||||||||
|
Chardan
Common
Stock
|
Chardan
Warrants
|
Chardan
Units
|
|||||||||||||||||
|
High
|
Low
|
High
|
Low
|
High
|
Low
|
||||||||||||||
|
2005
Third Quarter
|
$
|
6.00
|
$
|
5.17
|
$
|
1.15
|
$
|
0.70
|
$
|
7.50
|
$
|
6.15
|
|||||||
|
2005
Fourth Quarter
|
$
|
5.75
|
$
|
5.15
|
$
|
1.86
|
$
|
1.01
|
$
|
9.30
|
$
|
7.20
|
|||||||
|
2006
First Quarter
(through
March 24, 2006)
|
$
|
12.50
|
$
|
5.74
|
$
|
7.00
|
$
|
1.65
|
$
|
9.10
|
$
|
26.25
|
|||||||
Holders
of Chardan common stock, warrants and units should obtain current market
quotations for their securities. The market price of Chardan common stock,
warrants and units could vary at any time before the stock
purchase.
In
connection with the stock purchase, HLS intends to apply for the quotation
of
the combined company’s common stock, warrants and units on the Nasdaq National
Market under the symbol “HLS,” “HLSSW” and “HLSSU,” respectively. If the
securities are not listed on the Nasdaq, they will continue to be traded on
the
over-the-counter bulletin board. Currently there is no trading market for any
of
the securities of HLS, and there can be no assurance that a trading market
will
develop.
Holders
As
of
February 13, 2005, there was one holder of record of the units, six holders
of record of the common stock and one holder of record of the warrants. Chardan
believes the beneficial holders of the units, common stock and warrants to
be in
excess of 400 persons each. Immediately after the acquisition of HollySys,
there
will be an additional six record shareholders who acquired shares in the
acquisition. It is anticipated that the number of holders of HLS common stock
after the Redomestication Merger will be the same as the number of holders
of
Chardan common stock.
Dividends
Chardan
has not paid any dividends on its common stock to date and do not intend to
pay
dividends prior to the completion of a business combination.
The
payment of dividends by HLS in the future will be contingent upon revenues
and
earnings, if any, capital requirements and general financial condition if
HollySys subsequent to completion of a business combination. The payment of
any
dividends subsequent to a business combination will be within the discretion
of
the then board of directors. It is the present intention of the board of
directors to retain all earnings, if any, for use in the business operations
and, accordingly, the board does not anticipate declaring any dividends in
the
foreseeable future.
SHARES
ELIGIBLE FOR FUTURE SALE
After
the
Redomestication Merger and consummation of the acquisition of HollySys, there
will be 30,500,000 shares of common stock outstanding. Of that amount,
7,000,000 shares will be registered and freely tradable without securities
law restriction (with 1,250,000 of those shares being held in escrow until
August 2008). Additionally, any of such shares held by “affiliates,” as
that term is defined in Rule 144 under the Securities Act, which generally
includes officers, directors or 10% stockholders will also be restricted from
public sale as “restricted stock.” The 23,500,000 shares of common stock
being issued in connection with the acquisition of HollySys will be “restricted
stock” and do not have any registration rights. In addition, there are
outstanding the 11,500,000 warrants issued in the initial public offering,
each to purchase one share of common stock that will be freely tradable after
the Redomestication Merger. The common stock issuable upon exercise of the
warrants, will be tradable, provided that there is a registration statement
in
effect at the time of their exercise. In addition, in connection with the
initial public offering, we issued a unit purchase option to the representative
of the underwriters which is exercisable for 250,000 units, comprised of
250,000 shares of common stock and 500,000 warrants, each warrant to
purchase one share of common stock. Such securities underlying the
representative’s unit purchase option and underlying securities have
registration rights and may be sold pursuant to Rule 144. Therefore, there
are
an aggregate of 12,250,000 shares of common stock that may be issued in the
future upon exercise of outstanding warrants and options.
In
general, under Rule 144, a person who has owned restricted shares of common
stock beneficially for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of
the
then average preceding four weekly trading volume or 1% of the total number
of
outstanding shares of common stock. Sales under Rule 144 are also subject to
manner of sale provisions, notice requirements and the availability of current
public information about the company. A person who has not been one of our
affiliates for at least the three months immediately preceding the sale and
who
has beneficially owned shares of common stock for at least two years is entitled
to sell the shares under Rule 144 without regard to the limitations described
above.
Before
the Redomestication Merger there was no market for the securities of HLS, and
no
prediction can be made about the effect that market sales of the common stock
of
HLS or the availability for sale of the common stock of HLS will have on the
market price of the common stock. It is anticipated that the market should
be
similar to that of Chardan because the Redomestication Merger will largely
be
substituting one security for another on as equal terms as is possible.
Nevertheless, sales of substantial amounts of our common stock in the public
market could adversely affect the market price for our securities and could
impair our future ability to raise capital through the sale of common stock
or
securities linked to the common stock.
DESCRIPTION
OF THE COMBINED COMPANY’S
SECURITIES
FOLLOWING THE STOCK PURCHASE
The
following description of the material terms of the capital stock and warrants
of
HLS following the stock purchase includes a summary of specified provisions
of
the Memorandum of Association and Articles of Association
of
HLS
that will be in effect upon completion of the stock purchase and the merger.
This description is subject to the relevant provisions of the Corporation Law
of
the British Virgin Islands and is qualified by reference to HLS’s Memorandum of
Association and Articles of Association
,
copies
of which are attached to this proxy statement/prospectus and are incorporated
in
this proxy statement/prospectus by reference.
General
HLS
has
no authorized share capital, but it will be authorized to issue 101,000,000
shares of all classes of capital stock, of which 100,000,000 will be ordinary
shares, no par value and 1,000,000 will be preference shares of, no par value.
The capital of HLS will be stated in United States dollars.
Ordinary
Shares
The
holders of the combined company’s ordinary shares are entitled to one vote for
each share on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. Subject to the preferences and rights, if any,
applicable to the shares of preference stock, the holders of the ordinary shares
are entitled to receive dividends if and when declared by the board of
directors. Subject to the prior rights of the holders, if any, of the preference
shares, the holders of the ordinary shares are entitled to share ratably in
any
distribution of the assets of the combined company upon liquidation, dissolution
or winding-up, after satisfaction of all debts and other
liabilities.
Preference
Stock
Shares
of
preference stock may be issued from time to time in one or more series and
the
board of directors of HLS, without approval of the stockholders, is authorized
to designate series of preference stock and to fix the rights, privileges,
restrictions and conditions to be attached to each such series of shares of
preference stock. The issuance of shares of preference stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of
holders of the combined company’s shares of common stock.
As
of the
date of this proxy statement/prospectus, there are no outstanding shares of
preference stock of any series.
Anti-takeover
Effect of Unissued Shares of Capital Stock
Common
Stock
.
After
the stock purchase and Redomestication Merger, HLS will have outstanding
approximately 30,500,000 shares of common stock, assuming that none of the
public stockholders elects to exercise the conversion rights. The remaining
shares of authorized and unissued common stock will be available for future
issuance without additional stockholder approval. While the additional shares
are not designed to deter or prevent a change of control, under some
circumstances the combined company could use the additional shares to create
voting impediments or to frustrate persons seeking to effect a takeover or
otherwise gain control by, for example, issuing those shares in private
placements to purchasers who might side with the combined company’s board of
directors in opposing a hostile takeover bid.
Preference
Stock
.
The
memorandum and articles will grant the board of directors the authority, without
any further vote or action by the combined company’s stockholders, to issue
preference stock in one or more series and to fix the number of shares
constituting any such series and the preferences, limitations and relative
rights, including dividend rights, dividend rate, voting rights, terms of
redemption, redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series. The existence of authorized
but unissued preference stock could reduce the combined company’s attractiveness
as a target for an unsolicited takeover bid since the combined company could,
for example, issue shares of preference stock to parties who might oppose such
a
takeover bid or shares that contain terms the potential acquirer may find
unattractive. This may have the effect of delaying or preventing a change in
control, may discourage bids for the common stock at a premium over the market
price of the common stock, and may adversely affect the market price of, and
the
voting and other rights of the holders of, common stock.
Warrants
As
of
December 31, 2005, there were warrants outstanding to purchase
11,500,000 shares of Common Stock. Each warrant entitles the registered holder
to purchase one share of our common stock at a price of $5.00 per share, subject
to adjustment as discussed below, at any time commencing on the later
of:
|
·
|
the
completion of the stock purchase;
or
|
|
·
|
August 2,
2006.
|
The
warrants will expire at 5:00 p.m., New York City time on August 2, 2009.
Chardan may call the warrants for redemption.
|
·
|
in
whole and not in part;
|
|
·
|
at
a price of $.01 per warrant at any time after the warrants become
exercisable;
|
|
·
|
upon
not less than 30 days’ prior written notice of redemption to each
warrantholder; and
|
|
·
|
if,
and only if, the reported last sale price of the common stock equals
or
exceeds $8.50 per share, for any 20 trading days within a 30 trading
day
period ending on the third business day prior to the notice of redemption
to warrantholders.
|
The
warrants have been issued in registered form under a warrant agreement between
Continental Stock Transfer & Trust Company, as warrant agent, and
Chardan.
The
exercise price and number of shares of common stock issuable on exercise of
the
warrants may be adjusted in certain circumstances, including in the event of
a
stock dividend, recapitalization, reorganization, stock purchase or
consolidation of the company. However, the warrants will not be adjusted for
issuances of common stock at a price below their respective exercise
prices.
The
warrants may be exercised upon surrender of the warrant certificate on or prior
to the expiration date at the offices of the warrant agent, with the exercise
form on the reverse side of the warrant certificate completed and executed
as
indicated, accompanied by full payment of the exercise price, by certified
check
payable to us, for the number of warrants being exercised. The warrantholders
do
not have the rights or privileges of holders of common stock and any voting
rights until they exercise their warrants and receive common stock. After the
issuance of shares of common stock upon exercise of the warrants, each holder
will be entitled to one vote for each share held of record on all matters to
be
voted on by stockholders.
The
warrants may be deprived of any value and the market for the warrants may be
limited if the prospectus relating to the common stock issuable upon the
exercise of the warrants is not current or if the common stock is not qualified
or exempt from qualification in the jurisdictions in which the holders of the
warrants reside. No fractional shares will be issued upon exercise of the
warrants. However, if a warrantholder exercises all warrants then owned of
record by him, Chardan will pay to the warrantholder, in lieu of the issuance
of
any fractional share which is otherwise issuable to the warrantholder, an amount
for such fractional share in cash based on the market value of the common stock
on the last trading day prior to the exercise date.
Purchase
Option
Chardan
has issued to the representative of the underwriters of its initial public
offering an option to purchase up to a total of 250,000 units at a per-unit
price of $7.50, commencing on the later of the consummation of the stock
purchase or August 2, 2006. The option expires on August 2, 2010. The
units issuable upon exercise of this option are the same as the publicly traded
units, consisting of one share of common stock and two warrants, except that
the
warrants are exercisable at $6.65. The option contains demand and piggy-back
registration rights for period of five and seven years, respectively, and the
combined company will bear the expenses of the registration of the securities
for the holders of the option. The exercise price and number of units are
subject to adjustment in certain circumstances, including a stock dividend,
recapitalization reorganization, merger or consolidation.
Registration
Rights Agreement
Chardan
has entered into a registration rights agreement providing for the registration
of the shares of common stock issued prior to the initial public offering and
the shares included in the purchase option. The warrants, to be exercisable,
must also continue to have the common stock underlying the warrants registered
on an effective registration statement.
Transfer
Agent and Registrar
The
transfer agent and registrar for the shares of Chardan common stock, warrants
and units is Continental Stock Transfer & Trust Company, 17 Battery Place,
New York, New York 10004, (212) 509-4000.
STOCKHOLDER
PROPOSALS
If
the
stock purchase is not consummated, the Chardan 2006 annual meeting of
stockholders will be held on or about ____________, 2006 unless the date is
changed by the board of directors. If you are a stockholder and you want to
include a proposal in the proxy statement for the year 2006 annual meeting,
you
need to provide it to us by no later than ____________, 2006. You should direct
any proposals to our secretary at Chardan’s principal office in San Diego, CA.
If you want to present a matter of business to be considered at the year 2006
annual meeting, under Chardan by-laws you must give timely notice of the matter,
in writing, to our secretary. To be timely, the notice has to be given by
________________.
LEGAL
MATTERS
Maples
& Calder, Road Town, Tortola, British Virgin Islands, have passed upon the
validity of the securities issued in connection with the Redomestication Merger
and certain other legal matters related to this joint proxy
statement/prospectus.
Guantao
Law Firm, Beijing, PRC, counsel to the HollySys Parties and HollySys Operating
Companies has opined as to the validity and enforceability of the consignment
agreements of the HollySys Parties with respect to Beijing HollySys. Reference
to their opinion has been included in this joint proxy statement/prospectus
and
given upon their authority as experts in the law of the PRC. A copy of their
opinion is filed as an exhibit to the Registration Statement of which this
joint
proxy/prospectus forms a part.
DLA
Piper
Rudnick Gray Cary US LLP, San Diego, California, has passed upon the tax matters
relating to the Redomestication Merger as set forth in this joint
proxy/prospectus. A copy of their opinion is filed as an exhibit to the
Registration Statement of which this joint proxy/prospectus forms a
part.
EXPERTS
The
financial statements of HollySys Holdings for the years ended June 30, 2003,
2004 and 2005 included in this joint proxy statement/prospectus and in the
registration statement of which this joint proxy/prospectus forms a part, have
been audited by BDO Reanda, an independent registered public accounting firm,
to
the extent and for the periods set forth in their report appearing elsewhere
herein and in the registration statement of which this joint proxy
statement/prospectus forms a part, and are included in reliance upon such report
given upon the authority of said firm as experts in auditing and
accounting.
The
financial statements of Chardan at December 31, 2005 and for the period from
March 10, 2005 (inception) to December 31, 2005, included in this
joint proxy statement/prospectus and in the registration statement have been
audited by Goldstein Golub Kessler LLP, an independent registered public
accounting firm, to the extent set forth in their report appearing elsewhere
in
this joint proxy statement/prospectus and in the registration statement and
are
included herein in reliance upon the authority of Goldstein Golub Kessler LLP
as
experts in accounting and auditing.
DELIVERY
OF DOCUMENTS TO STOCKHOLDERS
Pursuant
to the rules of the SEC, HLS and services that it employs to deliver
communications to its stockholders are permitted to deliver to two or more
stockholders sharing the same address a single copy of each of HLS’s annual
report to stockholders and HLS’s proxy statement. Upon written or oral request,
HLS will deliver a separate copy of the annual report to stockholder and/or
proxy statement to any stockholder at a shared address to which a single copy
of
each document was delivered and who wishes to receive separate copies of such
documents in the future. Stockholders receiving multiple copies of such
documents may likewise request that HLS deliver single copies of such documents
in the future. Stockholders may notify HLS of their requests by calling or
writing Lori Johnson at its principal executive offices at HLS c/o Chardan
North
China Acquisition Corporation, 625 Broadway, Suite 1111, San Diego,
California 92101. In addition, HLS will make available free of change through
an
Internet website its annual report, quarterly reports, 8-K reports and other
SEC
filings.
WHERE
YOU CAN FIND MORE INFORMATION
Chardan
files reports, proxy statements and other information with the Securities and
Exchange Commission as required by the Securities Exchange Act of 1934, as
amended. You may read and copy reports, proxy statements and other information
filed by Chardan with the Securities and Exchange Commission at the Securities
and Exchange Commission public reference room located at Judiciary Plaza, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. You may also obtain copies
of the materials described above at prescribed rates by writing to the
Securities and Exchange Commission, Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549. You may also access information on Chardan at
the
Securities and Exchange Commission web site at: http://www.sec.gov.
After
the
stock purchase, if the securities of HLS are listed on the Nasdaq Stock Market,
unless you notify HLS of your desire not to receive these reports, the combined
company will furnish to you all periodic reports that it files with the
Securities and Exchange Commission, including audited annual consolidated
financial statements and unaudited quarterly consolidated financial statements,
as well as proxy statements and related materials for annual and special
meetings of stockholders.
Information
and statements contained in this proxy statement/prospectus, or any annex to
this proxy statement/prospectus incorporated by reference in this proxy
statement/prospectus, are qualified in all respects by reference to the copy
of
the relevant contract or other annex filed as an exhibit to this proxy
statement/prospectus or incorporated in this proxy statement/prospectus by
reference.
All
information contained in this proxy statement/prospectus or incorporated in
this
proxy statement/prospectus by reference relating to Chardan has been supplied
by
Chardan, and all such information relating to the HollySys Parties has been
supplied by the HollySys Parties. Information provided by either of us does
not
constitute any representation, estimate or projection of the other.
If
you
would like additional copies of this proxy statement/prospectus, or if you
have
questions about the stock purchase, you should contact:
Lori
Johnson
c/o
Chardan North China Acquisition Corporation
625
Broadway, Suite 1111
San
Diego, CA 92101
[Outside
Back Cover of Prospectus]
Until
[__________________25
days after effective date]
,
all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is
in addition to the dealers' obligation to deliver a prospectus when acting
as
underwriters and with respect to their unsold allotments or
subscriptions.
CHARDAN
NORTH CHINA ACQUISITION CORPORATION
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
Consolidated
Financial Statements
|
|
|
Report
of Independent Registered Public Accounting Firm
|
FI-2
|
|
Balance
Sheet
|
FI-3
|
|
Statements
of Operation
|
FI-4
|
|
Statement
of Stockholders’ Equity
|
FI-5
|
|
Statement
of Cash Flows
|
FI-6
|
|
Notes
to Financial Statements
|
FI-7
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Chardan
North China Acquisition Corp.
We
have
audited the accompanying balance sheet of Chardan North China Acquisition
Corporation (a corporation in the development stage) as of December 31, 2005,
and the related statements of operations, stockholders' equity and cash flows
for the period from March 10, 2005 (inception) to December 31, 2005. These
financial statements are the responsibility of the Company's management.
Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Chardan North China Acquisition
Corporation as of December 31, 2005, and the results of its operations and
its
cash flows for the period from March 10, 2005 (inception) to December 31,
2005
in conformity with United States generally accepted accounting
principles.
GOLDSTEIN
GOLUB KESSLER LLP
New
York,
New York
March
15,
2006
|
Chardan
North China Acquisition Corporation
|
||||
|
(A
Development Stage Company)
|
||||
|
Statement
of Operations
|
||||
|
From
|
||||
|
March
10, 2005
|
||||
|
(Inception)
|
||||
|
Through
|
||||
|
December
31, 2005
|
||||
|
Costs
and Expenses
|
||||
|
Admin
and office support
|
37,500
|
|||
|
Consulting
|
66,700
|
|||
|
Insurance
|
29,167
|
|||
|
Professional
fees
|
127,957
|
|||
|
State
franchise tax
|
23,775
|
|||
|
Travel
|
147,091
|
|||
|
Other
operating costs
|
21,673
|
|||
|
Total
costs and expenses
|
453,863
|
|||
|
Operating
loss
|
(453,863
|
)
|
||
|
Other
income:
|
||||
|
Interest
income
|
347,871
|
|||
|
Net
loss before income tax provision
|
(105,992
|
)
|
||
|
Income
tax benefit
|
4,250
|
|||
|
Net
loss
|
$
|
(101,742
|
)
|
|
|
Loss
per share - basic and diluted
|
(0.03
|
)
|
||
|
Weighted
average shares outstanding - basic and diluted
|
4,020,202
|
|||
|
See
the accompanying notes to the financial
statements
|
||||
|
Chardan
North China Acquisition Corporation
|
||||||||||||||||
|
(A
Development Stage Company)
|
||||||||||||||||
|
Statements
of Changes in Stockholders' Equity
|
||||||||||||||||
|
|
Additional
|
Stockholders'
|
||||||||||||||
|
Common
|
Paid
- In
|
Accumulated
|
Equity
|
|||||||||||||
|
Shares
|
Amount
|
Capital
|
(Deficit)
|
(Deficit)
|
||||||||||||
|
Issuance
of common shares to initial shareholders on March 10, 2005
|
1,250,000
|
$
|
125
|
$
|
24,875
|
$
|
-
|
$
|
25,000
|
|||||||
|
at
$0.02 per share
|
||||||||||||||||
|
Sale
of 5,750,000 units, net of underwriters' discount and offering
expenses
|
5,750,000
|
575
|
30,945,168
|
-
|
30,945,743
|
|||||||||||
|
(includes
1,149,425 shares subject to possible conversion)
|
-
|
|||||||||||||||
|
Proceeds
subject to possible conversion of 1,149,425 shares
|
-
|
-
|
(5,964,017
|
)
|
-
|
(5,964,017
|
)
|
|||||||||
|
Proceeds
from issuance of an underwriter's option
|
-
|
-
|
100
|
-
|
100
|
|||||||||||
|
Loss
for the period ended December 31, 2005
|
-
|
-
|
-
|
(101,742
|
)
|
(101,742
|
)
|
|||||||||
|
Balance
at December 31, 2005
|
7,000,000
|
$
|
700
|
$
|
25,006,126
|
$
|
(101,742
|
)
|
$
|
24,905,084
|
||||||
|
See
the accomanying notes to the financial
statements
|
||||||||||||||||
|
Chardan
North China Acquisition Corporation
|
|
(A
Development Stage Company)
|
|
Statement
of Cash Flows
|
|
From
|
||||
|
March
10, 2005
|
||||
|
(Inception)
|
||||
|
Through
|
||||
|
December
31, 2005
|
||||
|
Cash
Flows from Operating Activities:
|
||||
|
Net
loss
|
$
|
(101,742
|
)
|
|
|
Adjustments
to reconcile net loss to net cash
used
in operating activities:
|
||||
|
|
||||
|
Amortization
of discounts and interest earned on securities held in
trust
|
(425,861
|
)
|
||
|
Changes
in operating Assets and Liabilities:
|
||||
|
Prepaid
expenses and other current assets
|
(48,333
|
)
|
||
|
Deferred
tax asset
|
(177,370
|
)
|
||
|
Accounts
payable and accrued liabilities
|
224,498
|
|||
|
Income
taxes payable
|
173,120
|
|||
|
Deferred
interest
|
86,395
|
|||
|
Net
cash used by operating activities
|
(269,293
|
)
|
||
|
Cash
Flows from Investing Activities:
|
||||
|
Purchases
of investments held in trust
|
(29,835,000
|
)
|
||
|
Net
cash used by investing activities
|
(29,835,000
|
)
|
||
|
Cash
Flows from Financing Activities
|
||||
|
Proceeds
from issuance of common stock
|
34,525,000
|
|||
|
Proceeds
from issuance of option
|
100
|
|||
|
Payment
of costs associated with public offering
|
(3,554,257
|
)
|
||
|
Advance
to affiliate
|
(10,170
|
)
|
||
|
Net
cash provided by financing activities
|
30,960,673
|
|||
|
Net
increase in cash and cash equivalents
|
856,380
|
|||
|
Cash
and cash equivalents, beginning of the period
|
-
|
|||
|
Cash
and cash equivalents, end of the period
|
$
|
856,380
|
||
|
See
the accomanying notes to the financial
statements
|
||||
1.
SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Business
and Organization
-
Chardan North China Acquisition Corp. (“Chardan North”) was incorporated in
Delaware on March 10, 2005 as a blank check company whose objective is to
acquire an operating business that has its primary operating facilities in
the
People Republic of China in any city or province north of the
YangtzeRiver.
Effective
July 14, 2005, the Company's Board of Directors and Initial Stockholders
authorized an amendment to the Company's Certificate of Incorporation to
change
the Company's name from Chardan China Acquisition Corp. II to Chardan North
China Acquisition Corporation.
In
August
2005, Chardan North commenced its efforts to locate a company with which
to
effect a business combination. After signing a definitive agreement for the
acquisition of a target business, such transaction will be submitted for
stockholder approval. In the event that stockholders owning 20% or more of
the
outstanding stock excluding, for this purpose, those persons who were
stockholders prior to the Offering, vote against the Business Combination
and
exercise their conversion rights described below, the Business Combination
will
not be consummated. All of the Company's stockholders prior to the Initial
Public Offering, including all of the officers and directors of the Company
("Initial Stockholders"), have agreed to vote their 1,250,000 founding shares
of
common stock in accordance with the vote of the majority in interest of all
other stockholders of the Company ("Public Stockholders") with respect to
the
Business Combination. After consummation of the Business Combination, all
of
these voting safeguards will no longer be applicable. With respect to a Business
Combination which is approved and consummated, any Public Stockholder who
voted
against the Business Combination may demand that the Company convert his
or her
shares. The per share conversion price will equal the amount in the Trust
Fund
as of the record date for determination of stockholders entitled to vote
on the
Business Combination divided by the number of shares of common stock held
by
Public Stockholders at the consummation of the Offering. Accordingly, Public
Stockholders holding 19.99% of the aggregate number of shares owned by all
Public Stockholders may seek conversion of their shares in the event of a
Business Combination.
Such
Public Stockholders are entitled to receive their per share interest in the
Trust Fund computed without regard to the shares held by Initial Stockholders.
Accordingly, a portion of the net proceeds from the offering (19.99% of the
amount originally held in the Trust Fund) has been classified as common stock
subject to possible conversion in the accompanying balance sheet and 19.99%
of
the related interest earned on the investments held in the Trust Fund has
been
recorded as deferred interest.
Cash
and Cash Equivalents
-- The
Company considers all highly liquid debt securities purchased with original
or
remaining maturities of three months or less to be cash equivalents. The
carrying value of cash equivalents approximates fair value.
Fair
Value of Financial Instruments
- The
carrying amounts of cash and cash equivalents, investments held in trust,
accounts payable and accrued liabilities approximate fair market value because
of the short maturity of those instruments.
Credit
Risk
- It is
the Company’s practice to place its cash equivalents in high quality money
market securities or certificate of deposit accounts with one major banking
institution. Certain amounts of such funds are not insured by the Federal
Deposit Insurance Corporation. However, the Company considers its credit
risk
associated with cash and cash equivalents to be minimal.
Investments
Held in Trust
-
Investments held in trust are invested in United States government securities
with a maturity of 180 days or less which are accounted for as a trading
security and recorded at market value which approximates amortized cost.
The
excess of market value over cost, exclusive of the deferred interest described
below, is included in interest income in the accompanying Statement of
Operations.
Deferred
Interest
-
Deferred interest consists of 19.99% of the interest earned on the investments
held in trust.
Income
Taxes
- The
Company uses the asset and liability method of accounting for income taxes
as
required by SFAS No. 109 “Accounting for Income Taxes”. SFAS No. 109 requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the carrying amounts and
the
tax basis of certain assets and liabilities. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Statutory taxes not based on income are included in state
franchise tax in the statement of operations.
Income
(Loss) Per Common Share
- The
Company computed basic and diluted earnings per share amounts for December
31,
2005 pursuant to SFAS No. 128, “Earnings per Share.” Basic earnings per share
(“EPS”) are computed by dividing the net income (loss) by the weighted average
common shares outstanding during the period. Diluted EPS reflects the additional
dilution for all potentially dilutive securities such as stock warrants and
options. The effect of the 11,500,000 outstanding warrants, issued in connection
with the initial public offering described in Note 5 has not been considered
in
the diluted EPS since the warrants are contingently exercisable. The effect
of
the 25,000 units included in the underwriters purchase option, as described
in
Note 5, along with the warrants underlying such units, has not been considered
in the diluted EPS calculation since the effect would be
antidilutive.
Recent
Authoritative Pronouncements
Share-Based
Payment
In
December 2004, the FASB issued a revision of SFAS 123 (“SFAS 123(R)”) that
will require compensation costs related to share-based payment transactions
to
be recognized in the statement of operations. With limited exceptions, the
amount of compensation cost will be measured based on the grant-date fair
value
of the equity or liability instruments issued. In addition, liability awards
will be re-measured each reporting period. Compensation cost will be recognized
over the period that an employee provides service in exchange for the award.
SFAS 123(R) replaces SFAS 123 and is effective January 1, 2006. Based on
the
number of shares and awards outstanding as of December 31, 2005 (and without
giving effect to any awards which may be granted in the fiscal year ending
December 31, 2006), we expect that the adoption of SFAS 123(R) will have
no
material impact to the financial statements.
The
Company does not believe that any other recently issued but not yet effective
accounting standards will have a material effect on the Company’s financial
position or results of operations.
2.
RELATED PARTY TRANSACTIONS
Commencing
on August 2, 2005 and ending upon the acquisition of a target business, the
Company incurs an administrative fee of $7,500 per month from Chardan Capital,
LLC, a company managed and partially owned by the Company's Chairman of the
Board. The fee includes the provision of office space and certain office
and
secretarial services. The statement of operations for the period ended December
31, 2005 includes $37,500 of such fees.
In
April
2005, two of the Company's stockholders advanced an aggregate of $80,000
to the
Company, on a non-interest bearing basis, for payment of offering expenses
on
the Company's behalf. These loans were repaid following the initial public
offering from the proceeds of the Offering.
In
May
2005 the Company made a non-interest bearing advance of $10,170 to an affiliate,
which is included in prepaid expenses and other current assets on the
accompanying balance sheet. This amount is due on demand, and is expected
to be
repaid in the first quarter of 2006.
| 3. |
INCOME
TAXES
|
Components
of income taxes are as follows:
|
Current
|
||||
|
Federal
|
$
|
134,731
|
||
|
State
|
38,389
|
|||
|
Total
Current
|
173,120
|
|||
|
Less
deferred income taxes
|
(177,370
|
)
|
||
|
Total
income taxes
|
$
|
(4,250
|
)
|
|
The
Deferred tax asset consists of the following:
|
Deferred
interest income
|
36,328
|
|||
|
Deferred
operating costs
|
141,042
|
|||
|
Deferred
transaction fees
|
37,238
|
|||
|
214,608
|
||||
|
Valuation
allowance
|
(37,238
|
)
|
||
|
$
|
177,130
|
The
valuation allowance releases the deferred tax asset for transaction costs
incurred in connection with the proposed transaction described in Note
7.
The
effective income tax differs from the statutory rate of 34% principally due
to
the increase in the valuation allowance.
4.
COMMITMENTS
In
September 2005, the Company entered into an agreement with a consulting firm
to
assist in the search to identify prospective target businesses for the Business
Combination. As part of the agreement, the consulting firm is to receive
$200,000, including $133,300 upon consummation of the Business Combination,
and
agreed to perform due diligence on such prospective target businesses as
well as
assist in structuring and consummating the business combination. The statements
of operations for the period ended December 31, 2005 include $66,700 relating
to
this agreement.
5.
COMMON
STOCK, COMMON STOCK PURCHASE WARRANTS AND OPTIONS
On
August
10, 2005, the Company sold 5,000,000 units ("Units") in the initial public
offering, and on August 17, 2005, the Company consummated the closing of
an
additional 750,000 units that were subject to the over-allotment option (the
“Offering”). Gross proceeds from the initial public offering were $34,500,000.
The Company paid a total of $3,035,000 in underwriting discounts and
commissions, and approximately $519,257 was paid for costs and expenses related
to the offering. After deducting the underwriting discounts and commissions
and
the offering expenses, the total net proceeds to the Company from the offering
was approximately $30,945,843, of which $29,835,000 was deposited into in
an
interest bearing trust account until the earlier of the consummation of a
business combination or the liquidation of the Company. The Company's
Certificate of Incorporation provides for mandatory liquidation of the Company,
without stockholder approval, in the event that the Company does not consummate
a Business Combination prior to February 10, 2007, or August 10, 2007 if
certain
extension criteria have been satisfied. In the event of liquidation, it is
likely that the per share value of the residual assets remaining available
for
distribution (including Trust Fund assets) will be less than the initial
public
offering price per share in the Offering due to costs related to the Offering
and since no value would be attributed to the Warrants contained in the Units
sold.
Each
Unit
consisted of one share of the Company's common stock, $.0001 par value, and
two
Redeemable Common Stock Purchase Warrants ("Warrants"). Each Warrant entitles
the holder to purchase from the Company one share of common stock at an exercise
price of $5.00 commencing the later of the completion of a Business Combination
or one year from the effective date of the Offering and expiring four years
from
the effective date of the Offering. The Warrants will be redeemable, at the
Company's option, at a price of $.01 per Warrant upon 30 days' notice after
the
Warrants become exercisable, only in the event that the last sale price of
the
common stock is at least $8.50 per share for any 20 trading days within a
30
trading day period ending on the third day prior to the date on which notice
of
redemption is given.
In
connection with this Offering, the Company issued an option, for $100, to
the
representative of the underwriters to purchase 250,000 Units at an exercise
price of $7.50 per Unit. The Company accounted for the fair value of the
option,
inclusive of the receipt of the $100 cash payment, as an expense of the public
offering resulting in a charge directly to stockholders' equity. The Company
estimated that the fair value of this option is approximately $550,000 ($2.20
per Unit) using a Black-Scholes option-pricing model. The fair value of the
option granted to the Representative is estimated as of the date of grant
using
the following assumptions: (1) expected volatility of 44.5%, based on the
volatilities of similar entities who have effected a business combination,
(2)
risk-free interest rate of 3.8% and (3) expected life of 5 years. The option
may
be exercised for cash or on a "cashless" basis, at the holder's option, such
that the holder may use the appreciated value of the option (the difference
between the exercise prices of the option and the underlying warrants and
the
market price of the units and underlying securities) to exercise the option
without the payment of any cash. In addition, the warrants underlying such
Units
are exercisable at $6.65 per share.
6.
STOCK
DIVIDEND
Effective
July 22, 2005, the Company's Board of Directors authorized a stock dividend
of
0.25 shares of common stock for each outstanding share of common stock. All
references in the accompanying financial statements to the number of shares
of
common stock have been retroactively restated to reflect this
transaction.
7.
SUBSEQUENT EVENTS - UNAUDITED
On
February 2, 2006, the Company entered into a definitive stock purchase agreement
pursuant to which it will acquire a controlling interest in Beijing HollySys
Company, Limited and Hangzhou HollySys Automation, Limited (collectively
referred to as "HollySys"). Upon completion of the transaction, Chardan North
will own 74.11% and 89.64%, respectively, of the two companies. If approved
by
the stockholders of Chardan North, the transaction is expected to close in
the
second quarter of 2006. At closing, Chardan North will change its name to
HLS
Systems International, Limited ("HLS" or the "Company").
Under
the
terms of the acquisition, Chardan North will acquire from participating
shareholders their equity interests in HollySys, by acquiring Gifted Time
Holdings, Ltd., a British Virgin Islands corporation that holds all of those
interests. The Gifted Time interests in HollySys will be exchanged for
23,500,000 shares of common stock of Chardan North equal to 77% of the total
issued and outstanding common stock of the post-transaction company, and
a cash
consideration of $30,000,000. A variable portion of the cash consideration
will
be deferred, ranging from $3,000,000 to $7,000,000, depending on the number
of
shares that Chardan North shareholders redeem, if any, in the process of
approving the transaction. The deferred cash compensation will either be
paid at
the rate of 50% of positive cash flow generated by the Company post-acquisition
based on audited financial statements or upon the receipt of $60,000,000
in
equity investment, whether from the exercise of issued and outstanding warrants
or other sources.
As
additional consideration, participating parties will be entitled to receive,
on
an all or none basis each year, an additional 2,000,000 shares for each of
the
next four fiscal years beginning with the year ending June 30, 2007 if HollySys
achieves the following operating after-tax profits:
|
FY
Ending June 30
|
After-Tax
Profit
|
|||
|
2007
|
$
|
23,000,000
|
||
|
2008
|
$
|
32,000,000
|
||
|
2009
|
$
|
43,000,000
|
||
|
2010
|
$
|
61,000,000
|
||
GIFTED
TIME HOLDINGS LTD.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
Consolidated
Financial Statements
|
|
|
Report
of Independent Registered Public Accounting Firm
|
FII-2
|
|
Consolidated
Balance Sheets
|
FII-3
|
|
Consolidated
Statements of Operations
|
FII-4
|
|
Consolidated
Statements of Stockholders’ Equity
|
FII-5
|
|
Consolidated
Statements of Cash Flows
|
FII-6
|
|
Notes
to Consolidated Financial Statements
|
FII-7
|
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors
We
have
audited the accompanying consolidated balance sheets of Gifted Time Holdings
Limited (the “Company”) as of June 30, 2004 and 2005, and the related
consolidated statements of income and comprehensive income, stockholders’ equity
and cash flows for each of the years in the three-year period ended June
30,
2005. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. The Company is
not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing
an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Gifted Time Holdings Limited.,
as
of June 30, 2004 and 2005 and the results of its operations and its cash
flows for each of the years in the three-year period ended June 30, 2005
in
conformity with accounting principles generally accepted in the United States
of
America.
BDO
Reanda
Beijing,
PRC
November
22, 2005
FII-2
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
|
June
30,
|
December
31,
|
|||||||||
|
2004
|
2005
|
2005
|
||||||||
|
(Unaudited)
|
||||||||||
|
ASSETS
|
||||||||||
|
Current
Assets:
|
||||||||||
|
Cash
and cash equivalents
|
$
|
7,292,741
|
$
|
9,234,139
|
$
|
12,930,747
|
||||
|
Contract
performance deposit in banks
|
965,793
|
955,432
|
1,983,469
|
|||||||
|
Term
deposit
|
100,000
|
704,120
|
285,869
|
|||||||
|
Notes
receivable
|
2,416,451
|
-
|
-
|
|||||||
|
Accounts
receivable, net of allowance for doubtful accounts $1,113,084,
$1,461,645
and $1,566,959
|
30,503,349
|
49,543,821
|
55,000,568
|
|||||||
|
Other
receivables, net of allowance for doubtful accounts $107,400,
$139,924 and
$137,864
|
1,443,420
|
2,498,811
|
3,472,105
|
|||||||
|
Advances
to suppliers
|
5,163,108
|
7,035,178
|
6,714,660
|
|||||||
|
Inventories
|
9,622,261
|
8,448,166
|
7,423,660
|
|||||||
|
Prepaid
consulting fee
|
-
|
58,902
|
32,527
|
|||||||
|
Total
current assets
|
57,507,123
|
78,478,569
|
87,843,605
|
|||||||
|
Property,
plant and equipment, net
|
9,078,407
|
13,904,262
|
17,495,754
|
|||||||
|
Long
term investments
|
3,420,491
|
3,681,267
|
5,311,819
|
|||||||
|
Total
assets
|
$
|
70,006,021
|
$
|
96,064,098
|
$
|
110,651,178
|
||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||||
|
Current
liabilities:
|
||||||||||
|
Short-term
bank loans
|
$
|
6,282,773
|
$
|
8,699,329
|
$
|
9,541,275
|
||||
|
Short-term
bank loan from related parties
|
1,812,338
|
2,416,480
|
2,478,253
|
|||||||
|
Current
portion of long-term loans
|
2,416,451
|
1,208,240
|
||||||||
|
Accounts
payable
|
10,590,315
|
17,364,691
|
19,050,811
|
|||||||
|
Deferred
revenue
|
11,922,811
|
10,787,462
|
8,671,297
|
|||||||
|
Dividend
payable
|
-
|
333,894
|
-
|
|||||||
|
Accrued
payroll and related expense
|
2,527,046
|
3,740,483
|
5,460,746
|
|||||||
|
Income
tax payable
|
1,239,799
|
269,067
|
246,608
|
|||||||
|
Warranty
liabilities
|
881,052
|
1,594,215
|
1,515,957
|
|||||||
|
Other
tax payables
|
4,956,040
|
6,481,446
|
4,842,888
|
|||||||
|
Accrued
liabilities
|
2,763,923
|
2,651,059
|
4,988,458
|
|||||||
|
Amounts
due to related parties
|
313,003
|
456,766
|
1,463,463
|
|||||||
|
Deferred
tax liabilities
|
17,543
|
78,754
|
61,689
|
|||||||
|
Total
current liabilities
|
45,723,094
|
56,081,886
|
58,321,445
|
|||||||
|
Long-term
liabilities:
|
||||||||||
|
Long-term
loans
|
5,195,370
|
6,645,321
|
6,815,197
|
|||||||
|
Total
liabilities
|
50,918,464
|
62,727,207
|
65,136,642
|
|||||||
|
Minority
interest
|
4,425,419
|
6,334,435
|
8,705,593
|
|||||||
|
Stockholders’
equity:
|
||||||||||
|
Common
stock, par value $1 per share,50,000 shares authorized, 50,000
shares
issued and outstanding
|
50,000
|
50,000
|
50,000
|
|||||||
|
Additional
paid-in capital
|
9,523,345
|
11,935,060
|
11,950,516
|
|||||||
|
Appropriated
earnings
|
1,211,043
|
3,296,008
|
3,296,008
|
|||||||
|
Retained
earnings
|
3,875,334
|
11,721,091
|
20,715,881
|
|||||||
|
Cumulative
translation adjustments
|
2,416
|
297
|
796,538
|
|||||||
|
Total
stockholder’s equity
|
14,662,138
|
27,002,456
|
36,808,943
|
|||||||
|
Total
liabilities and stockholders' equity
|
$
|
70,006,021
|
$
|
96,064,098
|
$
|
110,651,178
|
||||
See
accompanying notes to financial statements.
FII-3
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
|
Years
Ended June 30,
|
December
31,
|
|||||||||||||||
|
2003
|
2004
|
2005
|
2004
|
2005
|
||||||||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Integrated
contract revenue
|
$
|
32,927,629
|
$
|
51,224,340
|
$
|
75,027,422
|
$
|
38,935,801
|
$
|
46,916,576
|
||||||
|
Products
sales
|
3,057,979
|
1,849,916
|
4,545,410
|
1,596,980
|
2,515,450
|
|||||||||||
|
Total
revenues
|
35,985,608
|
53,074,256
|
79,572,832
|
40,532,781
|
49,432,026
|
|||||||||||
|
Cost
of integrated contracts
|
24,347,692
|
37,569,353
|
52,164,176
|
27,399,787
|
31,949,229
|
|||||||||||
|
Cost
of products sold
|
1,532,781
|
338,167
|
2,518,835
|
182,027
|
1,478,696
|
|||||||||||
|
Gross
profit
|
10,105,135
|
15,166,736
|
24,889,821
|
12,950,967
|
16,004,101
|
|||||||||||
|
Operating
expenses:
|
||||||||||||||||
|
Selling
|
2,995,307
|
4,521,884
|
5,646,565
|
3,049,084
|
3,382,998
|
|||||||||||
|
General
and administrative
|
2,613,109
|
2,678,262
|
5,136,383
|
2,794,272
|
3,789,349
|
|||||||||||
|
Research
and development
|
346,243
|
383,059
|
202,344
|
-
|
-
|
|||||||||||
|
Impairment
loss
|
621,893
|
139,937
|
-
|
-
|
-
|
|||||||||||
|
Loss
on disposal of assets
|
13,020
|
11,963
|
29,511
|
2,806
|
14,512
|
|||||||||||
|
Total
operating expenses
|
6,589,572
|
7,735,105
|
11,014,803
|
5,846,162
|
7,186,859
|
|||||||||||
|
Income
from operations
|
3,515,563
|
7,431,631
|
13,875,018
|
7,104,805
|
8,817,242
|
|||||||||||
|
Other
income (expense), net
|
20,839
|
31,792
|
194,547
|
75,639
|
(89,846
|
)
|
||||||||||
|
Interest
expense, net
|
(903,744
|
)
|
(832,110
|
)
|
(555,796
|
)
|
(197,069
|
)
|
(580,379
|
)
|
||||||
|
Investment
income (loss)
|
246,764
|
90,492
|
664,889
|
565,835
|
544,223
|
|||||||||||
|
Subsidy
income
|
634,612
|
2,782
|
2,292,880
|
1,824,172
|
2,737,028
|
|||||||||||
|
Income
before income taxes
|
3,514,034
|
6,724,587
|
16,471,538
|
9,373,382
|
11,428,268
|
|||||||||||
|
Income
taxes expenses
|
636,816
|
947,768
|
401,468
|
169,717
|
249,035
|
|||||||||||
|
Income
before minority interest
|
2,877,218
|
5,776,819
|
16,070,070
|
9,203,665
|
11,179,233
|
|||||||||||
|
Minority
interest
|
650,084
|
1,041,543
|
2,366,549
|
1,632,303
|
2,184,443
|
|||||||||||
|
Net
income
|
$
|
2,227,134
|
$
|
4,735,276
|
$
|
13,703,521
|
$
|
7,571,362
|
$
|
8,994,790
|
||||||
|
Other
comprehensive income (loss):
|
||||||||||||||||
|
Translation
adjustments
|
(310
|
)
|
1,212
|
(2,119
|
)
|
270
|
796,241
|
|||||||||
|
Comprehensive
income
|
$
|
2,226,824
|
$
|
4,736,488
|
$
|
13,701,402
|
$
|
7,571,632
|
$
|
9,791,031
|
||||||
See
accompanying notes to financial statement
FII-4
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
|
Additional
|
Accumulated
|
||||||||||||||||||
|
Common
|
Paid-in
|
Appropriated
|
Retained
|
Comprehensive
|
|||||||||||||||
|
Stock
|
Capital
|
Earnings
|
Earnings
|
Income
(Loss)
|
Total
|
||||||||||||||
|
Balance
at July 1, 2002
|
$
|
50,000
|
$
|
8,920,012
|
$
|
527,153
|
$
|
(2,403,186
|
)
|
$
|
1,514
|
$
|
7,095,493
|
||||||
|
Forgiveness
of accounts payable
|
-
|
3,032
|
-
|
-
|
-
|
3,032
|
|||||||||||||
|
Net
income for the year
|
-
|
-
|
-
|
2,227,134
|
-
|
2,227,134
|
|||||||||||||
|
Translation
adjustments
|
-
|
-
|
-
|
-
|
(310
|
)
|
(310
|
)
|
|||||||||||
|
Balance
at June 30, 2003
|
50,000
|
8,923,044
|
527,153
|
(176,052
|
)
|
1,204
|
9,325,349
|
||||||||||||
|
Capital
infused
|
-
|
600,000
|
-
|
-
|
-
|
600,000
|
|||||||||||||
|
Forgiveness
of accounts payable
|
-
|
301
|
-
|
-
|
-
|
301
|
|||||||||||||
|
Net
income for the year
|
-
|
-
|
-
|
4,735,276
|
-
|
4,735,276
|
|||||||||||||
|
Appropriation
|
-
|
-
|
683,890
|
(683,890
|
)
|
-
|
-
|
||||||||||||
|
Translation
adjustments
|
-
|
-
|
-
|
-
|
1,212
|
1,212
|
|||||||||||||
|
Balance
at June 30, 2004
|
50,000
|
9,523,345
|
1,211,043
|
3,875,334
|
2,416
|
14,662,138
|
|||||||||||||
|
Donation
received
|
-
|
11,715
|
-
|
-
|
-
|
11,715
|
|||||||||||||
|
Net
income for the year
|
-
|
-
|
-
|
13,703,521
|
-
|
13,703,521
|
|||||||||||||
|
Appropriation
|
-
|
-
|
2,084,965
|
(2,084,965
|
)
|
-
|
-
|
||||||||||||
|
Dividends
paid
|
-
|
-
|
-
|
(1,372,799
|
)
|
-
|
(1,372,799
|
)
|
|||||||||||
|
Converted
into capital
|
-
|
2,400,000
|
-
|
(2,400,000
|
)
|
-
|
-
|
||||||||||||
|
Translation
adjustments
|
-
|
-
|
-
|
-
|
(2,119
|
)
|
(2,119
|
)
|
|||||||||||
|
Balance
at June 30, 2005
|
50,000
|
11,935,060
|
3,296,008
|
11,721,091
|
297
|
27,002,456
|
|||||||||||||
|
Forgiveness
of accounts payable
|
-
|
9,924
|
-
|
-
|
-
|
9,924
|
|||||||||||||
|
Donation
received
|
-
|
5,532
|
-
|
-
|
-
|
5,532
|
|||||||||||||
|
Net
income for the period (unaudited)
|
-
|
-
|
-
|
8,994,790
|
-
|
8,994,790
|
|||||||||||||
|
Translation
adjustments (unaudited)
|
-
|
-
|
-
|
-
|
796,241
|
796,241
|
|||||||||||||
|
Balance
at December 31, 2005 (unaudited)
|
$
|
50,000
|
$
|
11,950,516
|
$
|
3,296,008
|
$
|
20,715,881
|
$
|
796,538
|
$
|
36,808,943
|
|||||||
See
accompanying notes to financial statements
FII-5
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
|
Years
Ended June 30,
|
Six
Months Ended
December
31,
|
|||||||||||||||
|
2003
|
2004
|
2005
|
2004
|
2005
|
||||||||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
|
Cash
flows from operating activities:
|
||||||||||||||||
|
Net
income
|
$
|
2,227,134
|
$
|
4,735,276
|
$
|
13,703,521
|
$
|
7,571,362
|
$
|
8,994,790
|
||||||
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
||||||||||||||||
|
Minority
interests
|
650,084
|
1,041,543
|
2,366,549
|
1,632,303
|
2,184,443
|
|||||||||||
|
Depreciation
and amortization
|
687,793
|
921,204
|
820,863
|
603,074
|
651,442
|
|||||||||||
|
Allowance
for doubtful accounts
|
270,015
|
364,034
|
381,085
|
44,474
|
103,254
|
|||||||||||
|
Provision
for inventories
|
-
|
-
|
-
|
-
|
420,299
|
|||||||||||
|
Impairment
loss
|
621,893
|
139,937
|
-
|
-
|
-
|
|||||||||||
|
Loss
on disposal of fixed assets
|
13,020
|
11,963
|
29,511
|
2,806
|
14,512
|
|||||||||||
|
Income
from equity investment
|
(246,764
|
)
|
(90,492
|
)
|
(664,889
|
)
|
(565,835
|
)
|
(544,223
|
)
|
||||||
|
Deferred
income tax assets
|
2,779
|
60,313
|
61,211
|
-
|
(17,065
|
)
|
||||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||||||
|
Accounts
receivables
|
(5,052,151
|
)
|
(8,339,720
|
)
|
(19,389,033
|
)
|
(8,701,413
|
)
|
(5,371,127
|
)
|
||||||
|
Inventories
|
(687,317
|
)
|
(3,596,096
|
)
|
1,174,095
|
821,347
|
573,282
|
|||||||||
|
Advance
to suppliers
|
(982,208
|
)
|
(2,783,687
|
)
|
(1,807,680
|
)
|
189,006
|
293,454
|
||||||||
|
Other
receivables
|
(119,209
|
)
|
(531,053
|
)
|
(958,797
|
)
|
97,065
|
(948,706
|
)
|
|||||||
|
Deposits
and other assets
|
(561,133
|
)
|
(242,852
|
)
|
(54,029
|
)
|
(145,369
|
)
|
(988,429
|
)
|
||||||
|
Advance
from customers
|
705,267
|
6,383,686
|
(1,135,349
|
)
|
952,944
|
(2,056,544
|
)
|
|||||||||
|
Accounts
payable
|
1,582,486
|
5,487,989
|
6,711,573
|
(307,911
|
)
|
1,699,511
|
||||||||||
|
Accruals
and other payable
|
787,018
|
3,936,289
|
3,339,142
|
1,166,157
|
2,315,380
|
|||||||||||
|
Tax
payable
|
568,258
|
702,573
|
(970,732
|
)
|
(147,880
|
)
|
(22,459
|
)
|
||||||||
|
Net
cash provided by (used in) operating activities
|
466,965
|
8,200,907
|
3,607,041
|
3,212,130
|
7,301,814
|
|||||||||||
|
Cash
flows from investing activities:
|
||||||||||||||||
|
Purchase
of fixed assets
|
(1,631,077
|
)
|
(1,912,101
|
)
|
(5,686,494
|
)
|
(2,955,846
|
)
|
(4,143,125
|
)
|
||||||
|
Acquisition
cost, net of cash acquired
|
(687,363
|
)
|
-
|
-
|
-
|
-
|
||||||||||
|
Disposal
(Purchase) of short-term investments
|
(269,408
|
)
|
(2,288,874
|
)
|
1,812,331
|
1,812,331
|
407,377
|
|||||||||
|
Addition
to long-term investments
|
(16,747
|
)
|
(142,574
|
)
|
(225,368
|
)
|
-
|
(1,288,692
|
)
|
|||||||
|
Proceeds
from disposing assets
|
98,269
|
1,766
|
358,443
|
264,111
|
350,943
|
|||||||||||
|
Dividends
received from long-term investments
|
-
|
44,650
|
20,165
|
-
|
-
|
|||||||||||
|
Interest
received from short-term investments
|
-
|
41,831
|
148,837
|
148,837
|
-
|
|||||||||||
|
Net
cash used in investing activities
|
(2,506,326
|
)
|
(4,255,302
|
)
|
(3,572,086
|
)
|
(730,567
|
)
|
(4,673,497
|
)
|
||||||
|
Cash
flows from financing activities:
|
||||||||||||||||
|
Capital
infused
|
-
|
600,000
|
-
|
-
|
-
|
|||||||||||
|
Proceeds
from (Repayments to) short-term loans
|
(2,053,785
|
)
|
1,691,516
|
3,020,600
|
(4,108,016
|
)
|
888,276
|
|||||||||
|
Proceeds
from long-term bank loans
|
4,832,435
|
-
|
6,645,321
|
4,832,961
|
-
|
|||||||||||
|
Repayments
to long term loans
|
(1,993,380
|
)
|
(2,053,984
|
)
|
(6,403,581
|
)
|
(3,987,193
|
)
|
(1,007,478
|
)
|
||||||
|
Due
to related parties
|
23,806
|
263,669
|
143,763
|
118,561
|
1,006,697
|
|||||||||||
|
Donation
received
|
-
|
-
|
2,892
|
2,892
|
-
|
|||||||||||
|
Dividend
paid
|
-
|
-
|
(1,508,125
|
)
|
-
|
(333,894
|
)
|
|||||||||
|
Net
cash provided by financing activities
|
809,076
|
501,201
|
1,900,870
|
(3,140,795
|
)
|
553,601
|
||||||||||
|
Effect
of foreign exchange rate changes
|
956
|
(2,955
|
)
|
5,573
|
488
|
514,690
|
||||||||||
|
Net
increase (decrease) in cash and cash equivalents
|
(1,229,329
|
)
|
4,443,851
|
1,941,398
|
(658,744
|
)
|
3,696,608
|
|||||||||
|
Cash
and cash equivalents, beginning of period
|
4,078,219
|
2,848,890
|
7,292,741
|
7,292,741
|
9,234,139
|
|||||||||||
|
Cash
and cash equivalents, end of period
|
$
|
2,848,890
|
$
|
7,292,741
|
$
|
9,234,139
|
$
|
6,633,997
|
$
|
12,930,747
|
||||||
See
accompanying notes to financial statements
FII-6
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
1 ─
ORGANIZATION
AND BUSINESS BACKGROUND
Gifted
Time Holdings Limited (the “Company”) was established under the law of British
Virgin Island on September 21, 2005 for the purpose to hold investment in
the
following entities:
| · |
Beijing
HollySys Co., Ltd. (74.11%); and
|
| · |
Hangzhou
HollySys Automation Co., Ltd. (60% as Beijing HollySys Co., Ltd.
holds the
remaining 40% interest in Hangzhou HollySys Automation Co.,
Ltd.)
|
Under
a
reorganization agreement entered on September 20, 2005, the owners accounting
for 74.11% interest in Beijing HollySys and the two owners accounting for
60%
interest in Hangzhou HollySys transferred their respective interest in the
above
two entities to the Company in exchange for 68.137% and 31.863% interest
of the
Company, essentially based on the book value of net assets as of June 30,
2005
transferred by the both parties into the Company. Consequently, the Company
has
combined 74.11% net assets of Beijing HollySys and 60% net assets of Hangzhou
HollySys as the total equity interest of the Company as of June 30,
2005.
In
accordance with paragraph 11 in SFAS No. 141 and Appendix D, paragraph D14
in
SFAS No. 141, this reorganization transaction was accounted for under carry-over
basis as there was a voting together agreement among the owners of 74.11%
interest in Beijing HollySys and a voting together agreement between the
two
owners of 60% interest in Hangzhou HollySys. Furthermore, these two executed
voting together agreements have given the voting control to the same individual,
who is the founder of Beijing HollySys. Therefore, there is a controls group
which has voting control over both entities.
As
a
result of exchanging the ownership between the Company and the above two
parties, both Beijing HollySys and Hangzhou HollySys became subsidiaries
of the
Company and the Company became the reporting entity for financial reporting
purpose. Accordingly, the consolidated financial statements of the above
two
entities became the historical financial statements of the Company. Prior
to
June 30, 2005 there were no operating activities in the Company.
Beijing
HollySys Co., Ltd. (thereafter HollySys) was established on September 25,
1996
under the laws of People’s Republic of China with a registered capital of RMB15
million (equivalent of approximately $1.8 million based on the exchange rate
on
September 30, 1996) and a 30-year operation life. A Chinese citizen (who
is the
founder of HollySys, thereafter “the founder”) infused cash of RMB5 million
(equivalent approximately $602,228) and a state-owned company named Beijing
Huake Hi-Tech Co., Ltd. contributed physical assets valued at RMB10 million
(equivalent approximately $1,204,457), which was based on a valuation report
rendered by a third-party valuation service provider.
On
March
2, 1998, HollySys increased its registered capital by receiving RMB5 million
(equivalent approximately $603,916), of which RMB4.1 million (equivalent
approximately $495,211) was from another Chinese citizen and the remaining
RMB900,000 (equivalent approximately $108,705) was from the founder.
Consequently, the state-owned company accounted for only 50% interest in
HollySys.
FII-7
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
1 ─
ORGANIZATION
AND BUSINESS BACKGROUND (Continued)
On
December 25, 1998, the owners of HollySys and three state-owned companies
namely
Beijing Science and Technology Venture Co., Ltd., Beijing State-Owned Assets
Management Co., Ltd., and Zhongguancun Hi-Tech Industry Promotion Center
entered
into a sponsor agreement to convert HollySys into a share-issuing company
which
is going to be listed on one of Stock Exchanges in China. During the process
of
applying for being a listing company, HollySys received cash infusion of
approximately RMB51.78 million (equivalent approximately $6.25 million) from
three state-owned companies. Of the total RMB51.78 million cash infusion,
RBM30
million (equivalent approximately $3.62 million, accounting for 30% interest)
from Beijing Science and Technology Venture Co., Ltd.; RMB20 million (equivalent
approximately $2.42 million, accounting for 20% interest) from Beijing
State-Owned Assets Management Co., Ltd.; and the remaining RMB1,777,676
(equivalent approximately $214,734, accounting for approximately 1.78% interest)
from Zhongguancun Hi-Tech Industry Promotion Center.
By
infusing cash of approximately RMB51.78 million, three new investors accounted
for approximately 51.78 % interest in HollySys whereas the three original
owners, Huake, the founder and another Chinese citizen, accounted for
approximately 24.11%, 14.23%, and 9.88% interest in HollySys. Due to the
facts
that there was a long waiting list for approval from China Security Regulatory
Commission (CSRC) and that certain business opportunities were no longer
in
existence in 1999 and 2000, HollySys ceased its effort to become a listing
company in China in 2000.
On
January 16, 2004 through the merger and acquisition auction market under
Chinese
government regulation, Beijing Science and Technology Venture sold its 30%
interest in HollySys to a Chinese citizen who represents two individual
investors in China.
On
July
13, 2005 through the merger and acquisition auction market regulated by Chinese
government, Beijing State-Owned Assets Management sold its 20% interest in
HollySys to Jinqiaotong Industry Development Co., Ltd., which is a privately
owned investment company in China and joined in the voting together agreement
with the owners of the 54.11% interest in Beijing HollySys.
During
the period from 1999 to 2001 HollySys used the newly infused cash to expand
its
business scope through investing in several investee companies that those
investee companies have been conducting similar or relevant businesses except
the 5% interest in Zhongjijing Consulting in which the Company is only a
passive
investor. These long-term investments were accounted for under either equity
method or cost method.
On
May
15, 2002, the Board of Directors of HollySys decided to acquire 40% interest
in
Beijing Haotong Science and Technology Development Co., Ltd. (thereafter
Haotong) which is a privately owned company doing business focused on railway
signal automated control with a 20-year operation life from October 26, 2000
to
October 25, 2020, 32% interest from a private investment company and 8% from
an
individual investor. The acquisition price was RMB5.72 million (equivalent
approximately $691,000) and the acquisition transaction was closed on July
1,
2002. On December 13, 2002, the Board of HollySys approved the decision to
increase HollySys’ interest holding from 40% to 70% for business development
consideration and the incremental purchase price was RMB3 million (equivalent
$362,000 based on the exchange rate on December 31, 2002) to purchase additional
30% interest from two individual investors. The acquisition was closed on
December 31, 2002, resulting in an accumulated goodwill of approximately
$449,592. After this acquisition, HollySys consolidated the financial statements
of Haotong into its financial statements. On June 30, 2003, HollySys determined
that the goodwill was impaired based on the estimated cash flow to be generated
by Haotong in the future at that date.
FII-8
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
1
─
ORGANIZATION AND BUSINESS BACKGROUND (Continued)
On
June
3, 2003 the Board of Directors of HollySys decided to expand its presence
in
Southern China through setting up a new subsidiary to expand its industrial
automation business. The Board found that the proper location was the capital
city of Zhejiang Province, Hangzhou, because the local city government offered
very attractive land usage right and income tax incentive program for HollySys
investment decision. On September 24, 2003, a new entity named Hangzhou HollySys
Co., Ltd. was set up with a total registered capital of $5 million and a
50-year
operation life. On November 20, 2003, Hangzhou HollySys received capital
of $1
million, of which HollySys accounted for $400,000, Jingboyuan Automation
Co.,
Ltd., a Chinese company which is related to the founder and another Chinese
investor, accounted for $300,000, and OSCAF Limited, a Cayman Islands based
company which is related to one member of management in HollySys, accounted
for
the remaining $300,000. On April 16, 2004, Jingboyuan transferred its 30%
interest in Hangzhou HollySys to Team Spirit Industrial Limited, a British
Virgin Islands based company which also is a related party to the other Chinese
investor. On March 16, 2005, Hangzhou HollySys declared dividends distribution
of approximately $4.05 million to the above three owners in proportion to
their
respective interest holding. In turn, the three owners used proceeds of $4
million from dividends received to send back to Hangzhou HollySys in order
to
fulfill the requirement to contribute the total registered capital up to
$5
million on April 14, 2005, which was substantiated by a capital verification
report rendered by a CPA firm registered in China. Based on the concept of
substance over form, the dividends distributed and capital of $2.4 million
received belonging to two 60% interest owners in Hangzhou HollySys were deemed
non-cash transaction for financial reporting purpose.
HollySys
has conducted its business focusing on industrial automation systems which
are
used in many industries including power generating, electric grid, computer
controlled manufacturing, chemistry, cement, petrochemical, glass manufacturing,
pharmaceutical, etc. and integrated controlling systems including monitoring
systems, signal distributing systems and other controlling systems mainly
used
in city railway transportation.
NOTE
2 ─ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation and Base of Presentation
The
consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant inter-company transactions
and
balances are eliminated during the process of consolidation. Investments
in
investee companies in which the Company does not have a controlling interest
(generally interest holding by the Company from 20% up to 50%), or for which
control is expected to be temporary, are accounted for using the equity method.
The Company’s shares of earnings (losses) of these investee companies are
included in the accompanying consolidated statement of income.
These
financial statements have been prepared in accordance with the accounting
principles generally accepted in the United States of America (“U.S.
GAAP”).
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with maturity of three months
or
less to be cash equivalents.
FII-9
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
2 ─ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreign
Currency Translations and Transactions
The
Renminbi (“RMB”), the national currency of PRC, is the primary currency of the
economic environment in which the operations of the Company are conducted.
The
Company uses the United States dollar (“U.S. dollars”) for financial reporting
purposes.
The
Company translates assets and liabilities into U.S. dollars using the rate
of
exchange prevailing at the balance sheet date, and the consolidated statement
of
income is translated at average rates during the reporting period. Adjustments
resulting from the translation of financial statements from RMB into U.S.
dollars are recorded in stockholders' equity as part of accumulated
comprehensive loss - translation adjustments. Gains or losses resulting from
transactions in currencies other than RMB are reflected in income for the
reporting period.
Revenue
Recognition
Revenues
generated from designing, building, and delivering customized integrated
industrial automation systems and providing relevant solutions are recognized
over the contact terms based on the percentage of completion method. The
contracts for designing, building, and delivering customized integrated
industrial automation systems are legally enforceable binding agreements
between
the Company and customers. Performance of these contracts often will extend
over
long periods, and the Company’s right to receive payments depends on its
performance in accordance with these contractual agreements. In accordance
with
AICPA’s SOP 81-1, “Accounting for Construction Contracts and Certain
Production-Type Contracts,” revenue recognition is based on an estimate of the
income earned to date, less income recognized in earlier periods. Estimates
of
the degree of completion are based on the costs incurred to date comparing
to
the expected total costs for the contracts. Revisions in the estimated profits
are made in the period in which the circumstances requiring the revision
become
known. Provisions, if any, are made currently for anticipated loss on the
uncompleted contracts. Revenue in excess of billings on the contracts is
recorded as unbilled receivables and included in accounts receivable. Billings
in excess of revenues recognized on the contracts are recorded as deferred
revenue until the above revenue recognition criteria are met. Billings are
rendered based on agreed milestones included in the contracts with
customers.
Revenue
generated from sales of electronic equipments are recognized when persuasive
evidence of an arrangement exists, delivery of the products has occurred,
customer acceptance has been obtained, which means the significant risks
and
rewards of the ownership have been transferred to the customer, the price
is
fixed or determinable and collectibility is reasonably assured.
Inventories
Inventories
are composed of raw materials and low value consumables, work in progress,
and
finished goods. Inventories are stated at the lower of cost or the market
based
on weighted average method. The work-in-progress represents the costs of
projects which have been initiated in accordance with specific contracts
and
have not completed yet.
FII-10
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
2 ─ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounts
Receivable, Other Receivable and Concentration of Credit
Risk
During
the normal course of business, the Company extends unsecured credit to its
customers. The credit terms of receivable range in general from 90 to 120
days
in line with the terms specified in the contracts. The Company does not require
collateral from its customers. The Company maintains its cash accounts at
credit
worthy financial institutions. The components of accounts receivable were
as
follows:
|
June
30,
|
December
31,
|
|||||||||
|
2004
|
2005
|
2005
|
||||||||
|
(Unaudited)
|
||||||||||
|
Billed
accounts receivable
|
$
|
15,733,934
|
$
|
26,884,479
|
$
|
27,829,718
|
||||
|
Unbilled
account receivable
|
15,882,499
|
24,120,987
|
28,737,809
|
|||||||
|
$
|
31,616,433
|
$
|
51,005,466
|
$
|
56,567,527
|
|||||
The
Company regularly evaluates and monitors the creditworthiness of each customer
on a case-by-case basis. At the end of each period, allowance for doubtful
accounts of billed accounts receivable has been accrued in accordance with
age
analysis method.
The
Company includes any accounts balances that are determined to be uncollectible,
in the allowance for doubtful accounts. After all attempts to collect a
receivable have failed, the receivable is written off against the allowance.
Based on the information available to management, the Company believes that
its
allowance for doubtful accounts as of June 30, 2003, 2004 and 2005 were
adequate, respectively. However, actual write-off might exceed the recorded
allowance.
The
following table presents allowance activities in accounts receivable
.
|
June
30,
|
December
31,
|
|||||||||
|
2004
|
2005
|
2005
|
||||||||
|
(Unaudited)
|
||||||||||
|
Beginning
balance
|
$
|
799,977
|
$
|
1,113,084
|
$
|
1,461,645
|
||||
|
Additions
charged to expense
|
313,107
|
460,926
|
217,920
|
|||||||
|
Recovery
|
-
|
(112,365
|
)
|
(112,606
|
)
|
|||||
|
Ending
balance
|
$
|
1,113,084
|
$
|
1,461,645
|
$
|
1,566,959
|
||||
Other
receivables include deposits required by the contract bidding service providers
for every contract the Company has bided for. Contract bidding service providers
will deduct a portion of deposit as service fees if the Company wins a contract
and the remaining balance will be returned to the Company after the bidding
process completes. If the Company does not win a contract, the deposit will
be
returned in full amount to the Company after the bidding process completes.
Other receivables also include
shipping
freight paid on behalf of customers which was not presented on invoices issued
by the Company for revenue recognition purpose.
The
Company assesses relevant collection possibility on a regular basis and provides
corresponding allowance for doubtful accounts.
FII-11
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
2 ─ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The
following table presents allowance activities in other receivables.
|
June
30,
|
December
31,
|
|||||||||
|
2004
|
2005
|
2005
|
||||||||
|
(Unaudited)
|
||||||||||
|
Beginning
balance
|
$
|
56,473
|
$
|
107,400
|
$
|
139,924
|
||||
|
Additions
charged to expense
|
50,927
|
32,524
|
-
|
|||||||
|
Recovery
|
-
|
-
|
(2,060
|
)
|
||||||
|
Ending
balance
|
$
|
107,400
|
$
|
139,924
|
$
|
137,864
|
||||
Property
and Equipment
Properties
and equipment are recorded at cost and are stated net of accumulated
depreciation. Depreciation expense is determined using the straight-line
method
over the shorter of the estimated useful lives of the assets as
follows:
|
Land
use right
|
49
years
|
|||
|
Buildings
|
30
years
|
|||
|
Machinery
|
5
years
|
|||
|
Software
|
5
years
|
|||
|
Vehicles
and other equipment
|
5
years
|
Maintenance
and repairs are charged directly to expense as incurred, whereas betterment
and
renewals are generally capitalized in their respective property accounts.
When
an item is retired or otherwise disposed of, the cost and applicable accumulated
depreciation are removed and the resulting gain or loss is recognized and
reflected as an item before operating income (loss).
Impairment
of Long-Lived Assets
The
Company adopts the provisions of Statement of Financial Accounting Standard
No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
No.144”). SFAS No.144 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of
an asset may not be recoverable through the estimated undiscounted cash flows
expected to result from the use and eventual disposition of the assets. Whenever
any such impairment exists, an impairment loss will be recognized for the
amount
by which the carrying value exceeds the fair value. There was impairment
of
long-lived assets of $621,893 (including impairment loss of $449,592 related
to
the goodwill resulting from purchasing 70% interest in Haotong and impairment
loss of $172,301 related to one investee company under either equity method),
$139,937 (impairment loss of $45,700 and $94,237, respectively, related to
the
long-term investments in two investee companies), and $0 for the years ended
June 30, 2003, 2004 and 2005, respectively. There was no impairment loss
of
long-lived assets in the six months ended December 31, 2004 and 2005,
respectively.
FII-12
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
2 ─ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-Term
Investments
The
Company accounted for its long-term investments under either equity method
or
cost method in accordance with equity interest holding percentage.
Fair
Value of Financial Instruments
The
carrying amount of cash, accounts receivable, other receivables, advance
to
vendor, accounts payable and accrued liabilities are reasonable estimates
of
their fair value because of the short maturity of these items. The fair value
of
amount due to related parties and stockholders are reasonable estimates of
their
fair value as the amount will be collected and paid off in a period less
than
one year.
Goodwill
Goodwill
arising from consolidation represents the excess of the cost of acquisition
over
the Group’s interest in the fair value of the identifiable assets and
liabilities of subsidiary or associate at the date of acquisition. Goodwill
is
not amortized and is tested for impairment at least annually.
Income
Taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”).
SFAS No. 109 requires an entity to recognize deferred tax liabilities and
assets. Deferred tax assets and liabilities are recognized for the future
tax
consequence attributable to the difference between the tax bases of assets
and
liabilities and their reported amounts in the financial statements. Deferred
tax
assets and liabilities are measured using the enacted tax rate expected to
apply
to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of
a change in tax rates is recognized in income in the period that included
the
enactment date.
HollySys
is registered in a high-tech zone located in Beijing and has been deemed
as a
high-tech company by Beijing Commission of Science and Technology. According
to
the preferential regulations specified by State Council, HollySys had entitled
to be subject to a favorable income tax rate at 15% comparing to a statutory
income tax rate of 33% (30% for the central government and 3% for the local
government) under the current tax laws of PRC.
Under
the
favorable 15% of corporate income tax rate
,
HollySys had received a 100% exemption of income tax for three years (from
October 1, 1996 to September 30, 1999) and a 50% exemption of corporate income
tax for three years (from October 1, 1999 to September 30, 2002). Effective
October 1, 2002 HollySys has been subject to a corporate income tax rate
at
15%.
Beijing
HollySys Haotong (Haotong) is registered in a high-tech zone located Beijing
and
has been deemed as a high-tech company by Beijing Commission of Science and
Technology. According to the preferential regulations specified by State
Council, Haotong had entitled to be subject to a favorable income tax rate
at
15%. Under the favorable 15% of corporate income tax rate Haotong received
a
100% exemption of income tax for three years from January 1, 2001 to December
31, 2003 and a 50% exemption of income tax for three years from January 1,
2004
to December 31, 2006.
FII-13
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
2 ─ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Hangzhou
HollySys is registered as foreign investment enterprise conducting production
function. Under the provisional regulations, Hangzhou HollySys has entitled
to
receive 6% reduction from 30% income tax rate belonging to the central
government and 0.6% from 3% income tax belonging to local government.
Accordingly, the applicable income tax should be 26.4%. In accordance with
the
foreign investment enterprise income tax law, Hangzhou HollySys has entitled
to
receive a 100% exemption of income tax for two years and a 50% exemption
of
income tax for the next three years since the first year Hangzhou HollySys
has
generated a taxable income on a continuing basis. During the fiscal years
ended
June 30, 2004 and 2005, Hangzhou HollySys was still under 100% exemption
status.
Value
Added Tax
All
of
subsidiaries of the Company are subject to value added tax (VAT) imposed
by PRC
government on its domestic product sales. The output VAT is charged to customers
who purchase goods from the Company and the input VAT is paid when the Company
purchases goods from its vendors. VAT rate is 17%, in general, depending
on the
types of product purchased and sold. The input VAT can be offset against
the
output VAT. VAT payable or receivable balance presented on the Company’s balance
sheets represents either the input VAT less than or larger than the output
VAT.
The debit balance represents a credit against future collection of output
VAT
instead of a receivable.
Research
and Development
Research
and development costs are expensed as incurred. Gross research and development
expense for new product development and improvements of existing products
by the
Company incurred for the fiscal years ended June 30, 2003, 2004 and 2005
were
$1,245,231, $1,947,538 and $1,714,809, respectively. The research and
development expense for the six months ended December 31, 2004 and 2005 were
$542,189 and
$877,373
.
After
offsetting against the government subsidies, which were specified for supporting
research and development effort via value added tax refund, the net research
and
development expenses for the fiscal years ended June 30, 2003, 2004 and 2005
were $346,243, $383,059 and $202,344, respectively. After offsetting against
the
government subsidies, the research and development expense for the six months
ended December 31, 2004 and 2005 were $0 and
$0
.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ materially from
those
estimates.
Appropriations
to Statutory Reserve
Under
the
corporate law and relevant regulations in China, all of subsidiaries of the
Company located in China are required to appropriate a portion of its retained
earnings to statutory reserve. All subsidiaries are
required
to appropriate 10% of its annual after-tax income each year to statutory
reserve
until the statutory reserve balance reaches 50% of the registered capital.
In
general, the statutory reserve shall not be used for dividend distribution
purpose.
FII-14
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
2
─
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive
Income (Loss)
The
Company adopted Statement of Financial Accounting Standard No. 130, “Reporting
Comprehensive Income” (“SFAS No. 130”), issued by the Financial Accounting
Standards Board (“FASB”). SFAS No. 130 establishes standards for reporting and
presentation
of comprehensive income (loss) and its components in a full set of
general-purpose financial statements. The Company has chosen to report
comprehensive income (loss) in the statements of income and comprehensive
income. Comprehensive income (loss) is comprised of net income and all changes
to stockholders’ equity except those due to investments by owners and
distributions to owners.
Recent
Accounting Pronouncements
In
November 2004, the FASB issued Statement of Accounting Standards No. 151,
“Inventory Costs, A Amendment of ARB No. 43, Chapter 4” (SFAS No. 151). SFAS No.
151 eliminates the “so abnormal” criterion in ARB No. 43 “Inventory Pricing.”
SFAS No. 151 no longer permits a company to capitalize inventory costs on
their
balance sheets when the production defect rate varies significantly from
the
expected rate. SFAS No. 151 reduces the differences between U.S. and
international accounting standards. SFAS No. 151 is effective for inventory
costs incurred during annual periods beginning after June 15, 2005. The Company
does not believe that this pronouncement will have a material effect on the
Company’s financial position and net income.
In
December 2004, the FASB issued the Statement of Financial Account Standards
No. 153, “Exchange of Nonmonetary Assets, An Amendment of APB Opinion
No. 29” (SFAS No. 153). SFAS No 153 addresses the measurement of
exchanges of nonmonetary assets. SFAS No. 153 eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive assets
in
paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary
Transactions, and replaces it with an exception for exchanges that do not
have
commercial substance. SFAS No. 153 specifies that a nonmonetary exchange
has commercial substance if the future cash flows of the entity are expected
to
change significantly as a result of the exchange.
The
provisions of SFAS No. 153 shall be effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005.
Earlier application is permitted for nonmonetary asset exchanges occurring
in
fiscal periods beginning after the date this Statement is issued. The provisions
of this Statement shall be applied prospectively. The Company does not believe
that this pronouncement will have a material effect on the Company’s financial
position and net income.
In
May 2005, the FASB issued Statement No. 154, “Accounting Changes and
Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes,
and Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements.” (SFAS No. 154). SFAS No. 154 changes the requirements for
the accounting for, and reporting of, a change in accounting principle.
Previously, most voluntary changes in accounting principles were required
to be
recognized by way of a cumulative effect adjustment within net income during
the
period of the change. SFAS No. 154 generally requires retrospective
application to the prior period financial statements of voluntary changes
in
accounting principles. SFAS No. 154 is effective for accounting changes
made in fiscal years beginning after December 15, 2005. However, SFAS
No. 154 does not change the transition provisions of any existing
FII-15
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
2
─
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
accounting
pronouncements. The Company does not believe that the adoption of SFAS
No. 154 will have a material effect on its results of operations or
financial condition.
NOTE
3 ─ INVENTORIES
|
June
30
|
December
31,
|
|||||||||
|
2004
|
2005
|
2005
|
||||||||
|
(Unaudited)
|
||||||||||
|
Raw
materials
|
$
|
2,414,098
|
$
|
2,799,849
|
$
|
3,137,741
|
||||
|
Work
in progress
|
3,059,501
|
943,574
|
1,098,326
|
|||||||
|
Finished
goods
|
4,136,110
|
4,690,852
|
3,593,375
|
|||||||
|
Low
value consumables
|
12,552
|
13,891
|
14,517
|
|||||||
|
Provision
|
(420,299
|
)
|
||||||||
|
$
|
9,622,261
|
$
|
8,448,166
|
$
|
7,423,660
|
|||||
NOTE
4 ─ PROPERTY, PLANT AND EQUIPMENT AND CONSTRUCTION IN
PROGRESS
A
summary
of property and equipment at cost is as follows:
|
June
30,
|
December
31,
|
|||||||||
|
2004
|
2005
|
2005
|
||||||||
|
(Unaudited)
|
||||||||||
|
Land
use right
|
$
|
697,594
|
$
|
697,603
|
$
|
715,435
|
||||
|
Buildings
|
5,190,563
|
5,190,628
|
12,712,377
|
|||||||
|
Machinery
|
1,253,417
|
1,432,699
|
1,786,587
|
|||||||
|
Electronic
equipment
|
1,603,374
|
1,927,300
|
2,187,760
|
|||||||
|
Software
|
282,256
|
303,908
|
387,094
|
|||||||
|
Motor
vehicles
|
394,838
|
469,939
|
615,097
|
|||||||
|
Office
furniture
|
222,522
|
217,162
|
153,691
|
|||||||
|
Other
equipment
|
146,386
|
175,848
|
174,377
|
|||||||
|
Construction
in progress
|
1,368,305
|
6,190,432
|
1,810,283
|
|||||||
|
11,159,255
|
16,605,519
|
20,542,701
|
||||||||
|
Accumulated
depreciation
|
(2,080,848
|
)
|
(2,701,257
|
)
|
(3,046,947
|
)
|
||||
|
$
|
9,078,407
|
$
|
13,904,262
|
$
|
17,495,754
|
|||||
The
depreciation and amortization for the years ended June 30, 2003, 2004 and
2005
was $687,793, $921,204 and $820,863, respectively. Depreciation and amortization
for the six months ended December 31, 2004 and 2005 were $603,074, and $651,442,
respectively.
FII-16
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
5
─
LONG-TERM INVESTMENTS
The
investments in the following several limited liability companies were accounted
for under either equity method or cost method. Regarding investment in HollySys
Zhonghao, the Company accounted for it under equity method even though its
interest holding was more than 50% as the investee company has been winding
down
its business since early fiscal 2003 and the assets to be consolidated would
be
minimal. It is management’s expectation that it will be dissolved in the near
future. The following information summarized the long-term investments at
June
30, 2004 and 2005 and December 31, 2005.
|
June
30, 2004
|
Interest
Held
|
Long-term
Investment
At
Cost
|
Equity
in Investee Company
|
Advance
to Investee Company
|
Subtotal
|
|||||||||||
|
Equity
Method
|
||||||||||||||||
|
HollySys
Information Technology
|
40
|
%
|
$
|
1,744,395
|
$
|
(30,638
|
)
|
$
|
74,563
|
$
|
1,788,320
|
|||||
|
HollySys
Electric Machinery
|
40
|
%
|
639,893
|
203,444
|
-
|
843,337
|
||||||||||
|
New
Huake Electric Tech
|
37.5
|
%
|
181,234
|
(11,943
|
)
|
-
|
169,291
|
|||||||||
|
HollySys
Zhonghao Automation
Engineering
|
89.11
|
%
|
39,459
|
84,711
|
-
|
124,170
|
||||||||||
|
Subtotal
|
2,604,981
|
245,574
|
74,563
|
2,925,118
|
||||||||||||
|
Cost
Method
|
||||||||||||||||
|
HollySys
Communication Equipment
|
11
|
%
|
132,905
|
-
|
-
|
132,905
|
||||||||||
|
Zhongjijing
Investment Consulting
|
5
|
%
|
362,468
|
-
|
-
|
362,468
|
||||||||||
|
Total
|
$
|
3,100,354
|
$
|
245,574
|
$
|
74,563
|
$
|
3,420,491
|
||||||||
|
June
30, 2005
|
Interest
Held
|
Long-term
Investment
At
Cost
|
Equity
in Investee Company
|
Advance
to Investee Company
|
Subtotal
|
|||||||||||
|
Equity
Method
|
||||||||||||||||
|
HollySys
Information Technology
|
40
|
%
|
$
|
1,771,222
|
$
|
4,721
|
$
|
203,271
|
$
|
1,979,214
|
||||||
|
HollySys
Electric Machinery
|
40
|
%
|
639,901
|
318,991
|
48,330
|
1,007,222
|
||||||||||
|
New
Huake Electric Tech
|
37.5
|
%
|
181,236
|
9,390
|
48,330
|
238,956
|
||||||||||
|
HollySys
Zhonghao Automation
Engineering
|
89.11
|
%
|
32,614
|
60,789
|
-
|
93,403
|
||||||||||
|
Subtotal
|
2,624,973
|
393,891
|
299,931
|
3,318,795
|
||||||||||||
|
Cost
Method
|
||||||||||||||||
|
Zhongjijing
Investment Consulting
|
5
|
%
|
362,472
|
-
|
-
|
362,472
|
||||||||||
|
Total
|
$
|
2,987,445
|
$
|
393,891
|
$
|
299,931
|
$
|
3,681,267
|
||||||||
During
fiscal 2005, HollySys disposed one of its investments listed above and accounted
for under cost method and received proceeds approximately $144,986 with a
disposal gain of approximately $12,100.
On March
26, 2005, HollySys received cash of 187, 209 from the liquidation committee
of
Beijing Dongfang Jinhe Environmental Technology Co., Ltd., where HollySys
accounted for 30% interest and investment was fully reserved at June 30,
2002.
The proceeds were recorded as part of investment income for fiscal
2005.
FII-17
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
5
─
LONG-TERM INVESTMENTS (Continued)
|
December
31, 2005
|
Interest
Held
|
Long-term
Investment
at
Cost
|
Equity
in Investee Company
|
Advance
to Investee Company
|
Subtotal
|
|||||||||||
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||
|
Equity
Method
|
||||||||||||||||
|
HollySys
Information Technology
|
40
|
%
|
$
|
1,830,245
|
$
|
98,815
|
$
|
-
|
$
|
1,929,060
|
||||||
|
HollySys
Electric Machinery
|
40
|
%
|
656,259
|
617,805
|
49,565
|
1,323,629
|
||||||||||
|
New
Huake Electric Tech
|
37.5
|
%
|
185,869
|
40,207
|
49,565
|
275,641
|
||||||||||
|
HollySys
Zhonghao Automation Engineering
|
89.11
|
%
|
111,522
|
3,892
|
-
|
115,414
|
||||||||||
|
Beijing
Techenergy Co., Ltd.
|
50
|
%
|
1,239,127
|
-
|
7,647
|
1,239,127
|
||||||||||
|
Subtotal
|
$
|
4,023,022
|
$
|
760,719
|
$
|
106,777
|
$
|
4,890,518
|
||||||||
|
Cost
Method
|
||||||||||||||||
|
Zhongjijing
Investment Consulting
|
5
|
%
|
371,738
|
-
|
-
|
371,738
|
||||||||||
|
Beijing
HollySys Equipment Technology Co., Ltd.
|
20
|
%
|
49,563
|
-
|
-
|
49,563
|
||||||||||
|
Total
|
$
|
4,444,323
|
$
|
760,719
|
$
|
106,777
|
$
|
5,311,819
|
||||||||
NOTE
6 ─ WARRANTY LIABILITY
|
June
30,
|
December
31,
|
|||||||||
|
2004
|
2005
|
2005
|
||||||||
|
(Unaudited)
|
||||||||||
|
Beginning
balance
|
$
|
492,275
|
$
|
881,052
|
$
|
1,594,215
|
||||
|
Expense
accrued
|
710,549
|
1,708,767
|
983,606
|
|||||||
|
Expense
incurred
|
(321,772
|
)
|
(995,604
|
)
|
(1,061,864
|
)
|
||||
|
Ending
balance
|
$
|
881,052
|
$
|
1,594,215
|
$
|
1,515,957
|
||||
FII-18
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
7 ─ SHORT-TERM BANK LOANS
At
June
30,
2004 and 2005, the Company’s short-term bank borrowings consisted of revolving
bank loans of $6,282,773 (of which approximately $6,041,128 located in HollySys
and the remaining balance located in Haotong) and $8,699,329 (of which
$6,041,201 located in HollySys, $2,416,480 located in Hangzhou HollySys and
the
remaining balance located in Haotong) from several banks, respectively. At
December 31, 2005, the Company’s short-term bank loan borrowing was $12,019,528,
of which $4,956,506 located in HollySys, $7,063,022 located in Hangzhou
HollySys. All these short-term bank loans (maturing from six months to one
year)
had fixed interest rates with interest rates ranging from 5.22% to 5.76%
per
annum. However, when these short-term bank loans were renewed, the interest
rates were subject to change based on the notice from the People’s Bank of
China, the central bank of China. Most of the short-term bank loans were
guaranteed by the Company related parties and third parties and one bank
loan of
$2,416,480 at June 30, 2005 and $2,478,253 at December 31, 2005 in Hangzhou
HollySys was collateralized by its plant and property. The proceeds from
these
short-term bank loans were used for working capital financing
purpose.
At
June
30, 2004 and 2005, there was a bank loan of $1,812,338 and $2,416,480 payable
to
a commercial bank which served as a trustee appointed by a related party
(that
is an investee company named HollySys Information Technology in which HollySys
holds 40% interest). At December 31, 2005, the outstanding balance was
$2,478,253. This loan had interest rate of 5.31%, 5.76%, and 5.76% at June
30,
2004 and 2005 and at December 31, 2005, which is the same market rate charged
by
that commercial bank for the loans lent with similar terms.
FII-19
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
8 ─ LONG-TERM LOANS
|
June
30,
|
December
31,
|
|||||||||
|
2004
|
2005
|
2005
|
||||||||
|
(Unaudited)
|
||||||||||
|
RMB-denominated
loan (RMB24 million) from Industry and Commercial Bank of China,
maturing
on December 26, 2005, bearing interest at 5.58% per annum, guaranteed
by
China Electronic Information Industry Group Co., Ltd.
|
$
|
2,416,451
|
$
|
1,208,240
|
$
|
-
|
||||
|
RMB-denominated
loan (RMB20 million) from Minsheng Bank of China, maturing on May
10,
2005, bearing interest at 5.49% per annum, guaranteed by Beijing
International Trust and Investment Co., Ltd.
|
2,416,451
|
-
|
-
|
|||||||
|
RMB-denominated
loan (RMB40 million) from Beijing Bank, maturing on November 8,
2005,
bearing interest at 5.49% per annum, guaranteed by: Beijing Zhongguancun
Science Technology Guaranty Co., Ltd. And HollySys pledged its
accounts
receivable to Zhongguancun Science Technology Guaranty Co., Ltd.
As
collateral.
|
2,778,919
|
-
|
-
|
|||||||
|
RMB-denominated
loan (RMB40 million) from Beijing Bank, maturing on July 15, 2007,
bearing
interest at 5.49% per annum, guaranteed by Beijing Zhongguancun
Science
Technology Guaranty Co., Ltd.
|
-
|
1,812,360
|
1,858,690
|
|||||||
|
RMB-denominated
loan (RMB40 million) from CITIC Trust & Investment Co., Ltd., maturing
January 21, 2007, bearing interest at 7.002% per annum,
guaranteed
by Beijing Zhongguancun Science Technology Guaranty Co., Ltd. and
HollySys
pledged a portion of its property located in Beijing to Zhongguancun
Science Technology Guaranty Co., Ltd. As collateral.
|
-
|
4,832,961
|
4,956,507
|
|||||||
|
Current
portion
|
(2,416,451
|
)
|
(1,208,240
|
)
|
-
|
|||||
|
$
|
5,195,370
|
$
|
6,645,321
|
$
|
6,815,197
|
|||||
FII-20
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
9 ─ INCOME TAXES
The
income generated by the Company before income taxes in years ended at 2003,
2004
and 2005, respectively, were as follows:
|
Years
Ended June 30,
|
||||||||||
|
2003
|
2004
|
2005
|
||||||||
|
HollySys
|
3,940,553
|
3,920,001
|
4,186,152
|
|||||||
|
Beijing
HollySys Haotong
|
(426,519
|
)
|
(48,749
|
)
|
310,763
|
|||||
|
Hangzhou
HollySys
|
-
|
2,853,335
|
11,974,623
|
|||||||
|
Total
|
$
|
3,514,034
|
$
|
6,724,587
|
$
|
16,471,538
|
||||
The
income tax provision was as follows:
|
Years
Ended June 30,
|
||||||||||
|
2003
|
2004
|
2005
|
||||||||
|
Income
taxes:
|
||||||||||
|
Current
|
$
|
634,037
|
$
|
887,455
|
$
|
340,257
|
||||
|
Deferred
|
2,779
|
60,313
|
61,211
|
|||||||
|
$
|
636,816
|
$
|
947,768
|
$
|
401,468
|
|||||
The
difference between the effective income tax rate and the expected statutory
rate
was as follows:
|
Years
Ended June 30,
|
||||||||||
|
2003
|
2004
|
2005
|
||||||||
|
Statutory
rate
|
33.0
|
%
|
33.0
|
%
|
33.0
|
%
|
||||
|
Income
tax rate reduction
|
(13.8
|
)
|
(14.9
|
)
|
(24.1
|
)
|
||||
|
Permanent
difference
|
(1.2
|
)
|
(4.1
|
)
|
(6.9
|
)
|
||||
|
Effective
income tax rate
|
18.0
|
%
|
14.0
|
%
|
2.0
|
%
|
||||
The
temporary differences that have given rise to the deferred tax liabilities
consist of the following:
|
June
30,
|
December
31,
|
|||||||||
|
2004
|
2005
|
2005
|
||||||||
|
(Unaudited)
|
||||||||||
|
Allowance
for doubtful accounts
|
$
|
177,058
|
$
|
211,481
|
$
|
229,735
|
||||
|
Inventory
provision
|
-
|
-
|
25,218
|
|||||||
|
Deferred
revenue
|
359,937
|
216,211
|
447,400
|
|||||||
|
Unamortized
goodwill
|
57,327
|
50,583
|
51,876
|
|||||||
|
Unamortized
deferred expenses
|
19,177
|
12,785
|
13,112
|
|||||||
|
Warranty
liabilities
|
91,199
|
92,310
|
155,670
|
|||||||
|
Inventory
cost adjustment
|
18,610
|
16,005
|
16,414
|
|||||||
|
Unbilled
accounts receivable
|
(740,851
|
)
|
(678,129
|
)
|
(1,001,114
|
)
|
||||
|
Net
deferred tax liabilities
|
$
|
(17,543
|
)
|
$
|
(78,754
|
)
|
$
|
(61,689
|
)
|
|
FII-21
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
10 ─ RELATED PARTY TRANSACTIONS
Related
Party Relationships
|
Name
of Related Parties
|
Relationship
with the Company
|
|||
|
HollySys
Zhonghao Automation Engineering Technology Co., Ltd. (a China
based
entity)
|
89.11%
owned by HollySys
|
|||
|
HollySys
information Technology Co., Ltd. (a China based entity)
|
40%
owned by HollySys
|
|||
|
New
Huake Electronic Technology Co., Ltd. (a China based
entity)
|
37.5%
owned by HollySys
|
|||
|
Shenzhen
HollySys Automation Engineering Co., Ltd. (a China based entity
with a
full reverse for impairment)
|
52%
owned by HollySys
|
|||
|
Beijing
Techenergy Co., Ltd.
|
50
û
owned
by HollySys
|
|||
|
HollySys
Electric Tech Co., Ltd (a China based entity)
|
40%
owned by HollySys
|
|||
|
HollySys
Equipment Technology Co., Ltd. (a China based entity)
|
20%
owned by HollySys
|
|||
|
Zhongjijing
Investment & Consulting Co., Ltd. (a China based
entity)
|
5%
owned by HollySys
|
|||
|
Sixth
Institute of Information Industry
|
One
of owners in HollySys
|
|||
|
Shanghai
Jinqiaotong Industrial Development Co., Ltd. (a China based
entity)
|
One
of owners in HollySys
|
|||
Leasing
from Related Parties
HollySys
entered into a lease agreement with HollySys Information Technology to lease
office space. The lease agreement is renewable on an annual basis. The basic
rental price has ranged from RMB1.4 or RMB1.5 per square per day during the
past
five years. The total rental per year depends on the total square meters
leased.
The total rental expense for the years ended June 30, 2003, 2004 and 2005
was
$107,178, $115,688, and $56,503, respectively. The rental expense for the
six
months ended December 31, 2004 and 2005 was $28,251 and $22,736,
respectively.
The
Company’s management believed that the collection of due from related parties
were reasonably assured and accordingly, no provision had been made for these
balances of due from related parties.
Due
to Related Parties
|
June
30
|
December
31,
|
|||||||||
|
2004
|
2005
|
2005
|
||||||||
|
(Unaudited)
|
||||||||||
|
Hangzhou
HollySys System Engineering Co., Ltd.
|
$
|
53,603
|
$
|
80,862
|
$
|
-
|
||||
|
HollySys
Zhonghao Automation Engineering Technology Co., Ltd.
|
138,879
|
200,767
|
210,243
|
|||||||
|
Sixth
Institute of Information Industry
|
108,439
|
163,055
|
138,006
|
|||||||
|
Shenzhen
HollySys Automation Engineering Co., Ltd.
|
12,082
|
12,082
|
-
|
|||||||
|
Shanghai
Jinqiaotong Industrial Development Co., Ltd.
|
-
|
-
|
1,115,214
|
|||||||
|
$
|
313,003
|
$
|
456,766
|
$
|
1,463,463
|
|||||
FII-22
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
10
─
RELATED PARTY TRANSACTIONS (Continued)
Shenzhen
HollySys Automation Engineering Co., Ltd. is under the process of liquidation
in
accordance with Chinese laws. The draft liquidation report is under way.
Hangzhou HollySys Systems Engineering Co., Ltd. is under the process of
liquidation. The estimated date for liquidation report will be June 30, 2006.
HollySys has been collecting all accounts receivable on behalf of HollySys
Zhonghao as the investee company did not have any employees since early 2004
and
its liquidation application is under the process after all collection work
has
been done. All the above amounts due to relate parties are due on
demand.
During
the six months ended December 31, 2005, one of investors in HollySys intended
to
acquire additional 20% interest in Hangzhou HollySys for a consideration
of
RMB35.7 million and made an advance of RMB9 million (equivalent of approximately
$1.12 million) to HollySys. However, this transaction did not consummate
during
the six-month period as the investor was unable to come up with adequate
cash
for the remaining balance of consideration. The advance would be returned
to the
investor in the first quarter of calendar year 2006.
NOTE
11
─
EQUITY TRASNACTIONS
On
November 20, 2003, two foreign investors infused their capital of $300,000
each,
totaling $600,000, into Hangzhou HollySys to account for 60% interest
together.
During
fiscal 2005, one of investee companies, HollySys Electric Machinery, received
donation of approximately $30,772 in which HollySys accounted for 40% interest.
Accordingly, HollySys recorded additional capital $12,309 and treated it
as a
non-cash transaction for cash flow statement purpose. Because only 74.11%
interest of HollySys was transferred into the Company, therefore, there was
$9,123 recognized as addition to additional paid-in capital in fiscal 2005
for
the Company reporting purpose.
Also
during fiscal 2005, Hangzhou HollySys received cash donation of $2,892 of
which
the owners of 60% interest in Hangzhou claimed for $1,753 and the owners
of
74.11% interest in HollySys claimed for $857, totaling $2,592. As long as
their
interest transferred to the Company, $2,592 was accounted for part of additional
paid-in capital.
During
the six months ended December 31, 2005, Hangzhou HollySys received two computers
from one vendor as a donation totaling $6,171. Of the $6,171, the owners
of 60%
interest in Hangzhou HollySys claimed for $3,702 and accounted it for additional
paid-in capital. In the meantime, being 40% owner in Hangzhou HollySys, the
owners of 74.11% interest in Beijing HollySys also claimed for $1,830 and
accounted it for additional paid-in capital. As long as their interest
transferred to the Company, the total of $5,532 was accounted for part of
additional paid-in capital.
FII-23
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
12
─
GOVERNMENT SUBSIDIES
The
local
government in Beijing and Hangzhou provided subsidies sourcing from value
added
tax collected to encourage Beijing HollySys’, Haotong’s and Hangzhou HollySys’
research and development effort and other subsidies to Beijing HollySys for
enterprise development purpose. Especially, in the early fiscal 2005 the
local
government in Beijing provided specified subsidies to offset interest expenses
to encourage Beijing HollySys's research and development effort. All subsidies
were accounted for based on the hard evidence that the respective entity
should
be entitled to receive these subsidies or that cash has been received. Subsidies
recognized for supporting research and development effort was first offset
against the relevant entity’s research and development expense. The remaining
balance of specified subsidies, if any, together with other subsidies, was
recognized as other income in accordance with internationally prevailing
practice. Government subsidies recognized by the respective entity were
summarized as follows:
|
Years
Ended June 30,
|
December
31,
|
||||||||||||||||
|
|
2003
|
2004
|
2005
|
2004
|
2005
|
||||||||||||
|
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
|
Subsidies
received:
|
$
|
1,115,584
|
$
|
1,398,360
|
$
|
1,662,261
|
$
|
1,535,400
|
$
|
1,255,008
|
|||||||
|
R
& D expenses offset
|
(
480,972
|
)
|
(
1,395,578
|
)
|
(67,262
|
)
|
(118,491
|
)
|
(
395,544
|
)
|
|||||||
|
HollySys
|
Interest
expenses offset
|
-
|
-
|
(241,648
|
)
|
(241,648
|
)
|
-
|
|||||||||
|
Subsidies
income
|
634,612
|
2,782
|
1,353,351
|
1,175,261
|
859,464
|
||||||||||||
| Hangzhou |
Subsidies
received:
|
-
|
115,914
|
1,825,287
|
1,035,299
|
2,339,694
|
|||||||||||
|
HollySys
|
R
& D expenses offset
|
-
|
(
115,914
|
)
|
(885,758
|
)
|
(386,388
|
)
|
(
481,828
|
)
|
|||||||
|
Subsidies
income
|
-
|
-
|
939,529
|
648,911
|
1,857,856
|
||||||||||||
|
Subsidies
received:
|
-
|
52,993
|
62,082
|
37,310
|
19,708
|
||||||||||||
|
Haotong
|
R
& D expenses offset
|
-
|
(
52,993
|
)
|
(62,082
|
)
|
(37,310
|
)
|
-
|
||||||||
|
Subsidies
income
|
-
|
-
|
-
|
-
|
19,708
|
||||||||||||
|
Subsidies
received:
|
1,115,584
|
1,567,267
|
3,549,630
|
2,608,009
|
3,614,400
|
||||||||||||
|
Total
|
R
& D expenses offset
|
(
480,972
|
)
|
(
1,564,485
|
)
|
(1,015,102
|
)
|
(542,189
|
)
|
(
877,372
|
)
|
||||||
|
Interest
expenses offset
|
-
|
-
|
(241,648
|
)
|
(241,648
|
)
|
-
|
||||||||||
|
Subsidies
income
|
634,612
|
2,782
|
2,292,880
|
1,824,172
|
2,737,028
|
||||||||||||
NOTE
13 ─ SUPPLEMENTORY INFORMATION ABOUT CASH
FLOWS
|
Cash
Paid
|
Years
Ended June 30,
|
Six
Months Ended December 31,
|
||||||||||||||
|
2003
|
2004
|
2005
|
2004
|
2005
|
||||||||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
|
Interest
|
$
|
921,672
|
$
|
867,621
|
$
|
991,880
|
$
|
263,113
|
$
|
930,302
|
||||||
|
Income
tax
|
65,768
|
184,976
|
1,311,003
|
304,565
|
274,444
|
|||||||||||
|
$
|
987,440
|
$
|
1,052,597
|
$
|
2,302,883
|
$
|
567,678
|
$
|
1,204,746
|
|||||||
FII-24
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
1
3
─ SUPPLEMENTORY INFORMATION ABOUT CASH FLOWS (Continued)
|
Non-cash
transactions
|
Years
Ended June 30,
|
Six
Months Ended December 31,
|
||||||||||||||
|
2003
|
2004
|
2005
|
2004
|
2005
|
||||||||||||
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||||
|
Additional
paid-in capital
|
$
|
3,032
|
$
|
301
|
$
|
9,123
|
-
|
$
|
9,924
|
|||||||
|
Minority
interest
|
$
|
1,059
|
$
|
105
|
$
|
3,186
|
-
|
$
|
3,467
|
|||||||
|
Accounts
payable
|
$
|
(
4,091
|
)
|
$
|
(
406
|
)
|
$
|
-
|
$
|
(13,391
|
)
|
|||||
|
Long-term
investment
|
-
|
-
|
$
|
12,309
|
-
|
-
|
||||||||||
|
Paid-in
capital
|
-
|
-
|
$
|
2,400,000
|
-
|
-
|
||||||||||
|
Retained
earning
|
-
|
-
|
$
|
(
2,400,000
|
)
|
-
|
-
|
|||||||||
|
Additional
paid-in capital
|
-
|
-
|
-
|
-
|
$
|
5,532
|
||||||||||
|
Minority
interest
|
$
|
639
|
||||||||||||||
|
Electronic
equipment
|
-
|
-
|
-
|
-
|
$
|
6,171
|
||||||||||
NOTE
14 - SUBSEQUENT EVENTS
On
February 2, 2006, the Company entered into a stock purchase agreement with
Chardan North China Acquisition Corporation ("CNCAC") pursuant to which CNCAC
will acquire 100% interest of Gifted Time Holdings Limited.
For
the
acquisition, CNCAC will form its own wholly-owned subsidiary under the laws
of
the British Virgin Islands, under the name HLS Systems International Limited
("HLS"). At the time of the closing, CNCAC will merge with and into HLS for
the
purpose of redomestication out of the United States to secure future tax
benefits. This redomestication merger will be achieved by a one-for-one exchange
of all the outstanding common stock of CNCAC for common stock of HLS and
the
assumption of all the rights and obligations of CNCAC by HLS, including
assumption of the outstanding warrants of CNCAC on the same terms as they
currently exist. Concurrent with the redomestication merger, HLS will acquire
all the common stock of HollySys Holdings by the issuance of shares and payment
of cash consideration as described below, making it a wholly owned subsidiary
of
HLS.
The
current management of the Company will continue to run the operations in
China.
Dr. Wang Changli, the founder of HollySys and CEO of the Company, will be
CEO of
HLS.
The
board
of directors of HLS will initially consist of nine persons, of whom three
members will be designated by HollySys stockholders, one member will be
designated by the board of directors of CNCAC and five members will be
independent directors. Madam Qiao Li, the current Chairperson of Beijing
HollySys, will become the Chairperson of HLS, and Dr. Wang will be one of
the
initial directors. Kerry S. Propper, a current director and executive officer
of
CNCAC, also will become a director of HLS. At least five of the other six
members of the HLS board of directors will satisfy the independence requirements
of Nasdaq. Consideration will be given in selection of directors to meeting
the
requirements of Sarbanes-Oxley and Nasdaq listing requirements.
FII-25
GIFTED
TIME HOLDINGS LIMITED
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2003, 2004 AND 2005
AND
SIX MONTHS ENDED DECEMBER 31, 2004 AND 2005
(Information
for the Six Months Ended December 31, 2004 and 2005 is
Unaudited)
NOTE
14 - SUBSEQUENT EVENTS (Continued)
The
consideration of acquiring 100% interest of the Company will be cash of $30
million and 23,500,000 shares of HLS’ common stock. Of the $30 million cash
consideration, up to $27 million will be payable at closing. In the event
that
some of CNCAC’s shareholders exercise their redemption rights, but not enough to
result in disapproval of the transaction, the amount to be paid at closing
might
fall to as low as $23 million. The balance between the $30 million owed and
the
amount actually paid at closing will be paid out on the basis of 50% of positive
cash flow of HLS, with respect to any fiscal year following the closing,
based
on HLS’ US GAAP audited financial statement, or in the event that HLS raises not
less than $60 million in equity through either the exercise of the warrants
or
by any other means. The 23.5 million shares of HLS will represent not less
than
77% of total outstanding shares. If all of the existing shareholders of Chardan
North China Acquisition exercise their warrants and no shareholder redeems
his
or her shares into cash, then the 23.5 million shares to be issued to the
shareholders of HollySys Holdings will represent no less than 54.9% of the
outstanding shares of HLS.
As
additional purchase price, the shareholder of the Company and their designees
will be issued, on an all or none basis per year, an aggregate of 8,000,000
shares of common stock of HLS (2,000,000 each year), if on a consolidated
basis,
HLS has after-tax profits in the following amounts for the indicated 12-month
periods ending June 30:
|
Year
ending June 30, After Tax Profit
|
||||
|
2007
|
$
|
23,000,000
|
||
|
2008
|
$
|
32,000,000
|
||
|
2009
|
$
|
43,000,000
|
||
|
2010
|
$
|
61,000,000
|
||
Whether
or not HLS has hit the after-tax profit target in any year will be determined
by
the Company's audit based on US GAAP, adjusted to exclude after-tax operating
profits from any subsequent acquisition for securities that have a dilutive
effect and any charge to earnings that results from the issuance of such
shares
for a prior year.
The
transaction is expected to be consummated before the end of fiscal 2006 of
the
Company, provided the stockholders of CNCAC approve this contemplated
transaction.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
20. Indemnification of Directors and Officers
Section
132 of the BVI Business Companies Act (“BCA”) generally provides for
indemnification and permits a company to obtain insurance. The Memorandum of
Association of the Registrant follows the statute. The Registrant intends to
obtain director and officer insurance at the consummation of the acquisition
of
the HollySys companies.
The
following is a statement of Section 132 of the BCA, as amended by Section 67
of
the BCA Amendment Act:
Indemnification.
(1)
Subject
to subsection (2) and its memorandum or articles, a company may indemnify
against all expenses, including legal fees, and against all judgments, fines
and
amounts paid in settlement and reasonably incurred in connection with legal,
administrative or investigative proceedings any person who
(a)
is
or was
a party or is threatened to be made a party to any threatened, pending or
completed proceedings, whether civil, criminal, administrative or investigative,
by reason of the fact that the person is or was a director of the company;
or
(b)
is
or
was, at the request of the company, serving as a director of, or in any other
capacity is or was acting for, another body corporate or a partnership, joint
venture, trust or other enterprise.
(2)
Subsection
(1) does not apply to a person referred to in that subsection unless the person
acted honestly and in good faith and in what he believed to be in the best
interests of the company and, in the case of criminal proceedings, the person
had no reasonable cause to believe that his conduct was unlawful.
(2A)
For
the
purposes of subsection (2), a director acts in the best interests of the company
if he acts in the best interests of:
(a)
the
company's holding company; or
(b)
a
shareholder or shareholders of the company;
in
either
case, in the circumstances specified in section 120(2), (3) or (4), as the
case
may be;
(3)
The
termination of any proceedings by any judgment, order, settlement, conviction
or
the entering of a
nolle
prosequi
does
not, by itself, create a presumption that the person did not act honestly and
in
good faith and with a view to the best interests of the company or that the
person had reasonable cause to believe that his conduct was
unlawful.
(3A)
Expenses,
including legal fees, incurred by a director in defending any legal,
administrative or investigative proceedings may be paid by the company in
advance of the final disposition of such proceedings upon receipt of an
undertaking by or on behalf of the director to repay the amount if it shall
ultimately be determined that the director is not entitled to be indemnified
by
the company in accordance with subsection (1).
(3B)
Expenses,
including legal fees, incurred by a former director in defending any legal,
administrative or investigative proceedings may be paid by the company in
advance of the final disposition of such proceedings upon receipt of an
undertaking by or on behalf of the former director to repay the amount if it
shall ultimately be determined that the former director is not entitled to
be
indemnified by the company in accordance with subsection (1) and upon such
other
terms and conditions, if any, as the company deems appropriate.
(3C)
The
indemnification and advancement of expenses provided by, or granted pursuant
to,
this section is not exclusive of any other rights to which the person seeking
indemnification or advancement of expenses may be entitled under any agreement,
resolution of members, resolution of disinterested directors or otherwise,
both
as to acting in the person's official capacity and as to acting in another
capacity while serving as a director of the company; and
(4)
If
a
person referred to in subsection (1) has been successful in defense of any
proceedings referred to in subsection (1), the person is entitled to be
indemnified against all expenses, including legal fees, and against all
judgments, fines and amounts paid in settlement and reasonably incurred by
the
person in connection with the proceedings.
(5)
A
company
shall not indemnify a person in breach of subsection (2) and, any indemnity
given in breach of that section is void and of no effect.
The
following is a statement of Section 133 of the BCA, as amended by Section 68
of
the BCA Amendment Act:
Insurance.
A
company
may purchase and maintain insurance in relation to any person, who is or was
a
director of the company, or who at the request of the company is or was serving
as a director of, or in any other capacity is or was acting for, another body
corporate or a partnership, joint venture, trust or other enterprise, against
any liability asserted against the person and incurred by the person in that
capacity, whether or not the company has or would have had the power to
indemnify the person against the liability under section 132.
Item
21.
Exhibits
and Financial Statement Schedules
Exhibit
Description
| 2.1 |
Stock
Purchase Agreement (Included in Annex A of the proxy
statement/prospectus)
(1)
|
| 2.2 |
Agreement
and Plan of Merger between Chardan North China Acquisition Corporation
and
Registrant
|
| 3.1 |
Memorandum
of Association of Registrant (Included in Annex B of the proxy
statement/prospectus)
|
| 3.2 |
Articles
of Association of Registrant (Included in Annex C of the proxy
statement/prospectus)
|
| 4.1 |
Form
of Unit Purchase Option (Incorporated by reference from Registration
Statement 333-125016, Exhibit 4.4)
|
| 4.2 |
Form
of Warrant Agreement between Continental Stock Transfer & Trust
Company and Chardan North China Acquisition Corp. (Incorporated by
reference from Registration Statement 333-125016, Exhibit
4.5)
|
| 5.1 |
Opinion
of Maples &Calder*
|
| 8.1 |
Tax
Opinion of DLA Piper Rudnick Gray Cary US
LLP
|
| 10.1 |
Chardan
North China Acquisition Corporation 2006 Equity Plan (Included in
Annex D
of the proxy statement/prospectus)
|
| 10.2 |
Form
of Stock Consignment Agreement
|
| 10.3 |
Form
of Employment Agreement
|
| 10.4 |
Registration
Rights Agreement (Incorporated by reference from Registration Statement
333-125016, Exhibit 10.11)
|
| 10.5 |
Opinion
re Consignment Agreements of Guantao Law
Firm
|
| 23.1 |
Consent
of Goldstein Golub Kessler LLP
|
| 23.2 |
Consent
of BDO Reanda Certified Public Accountants
Ltd.
|
| 23.3 |
Consent
of Maples & Calder (included in Exhibit
5.1)
|
| 23.4 |
Consent
of Guantao Law Firm (included in Exhibit
10.5)
|
| 23.5 |
Consent
of DLA Piper Rudnick Gray Cary US LLP (included in
Exhibit 8.1)
|
| (1) |
As
required by paragraph (b)(2) of Item 601 of Regulation S-K, this
exhibit
does not contain schedules and similar attachments to this exhibit.
The
registrant will furnish supplementally a copy of any omitted schedules
to
the Commission upon request.
|
| * |
To
be filed by amendment.
|
Item
22. Undertakings
The
undersigned registrant hereby undertakes:
(1)
To
file,
during any period in which offers or sales are being made, a post effective
amendment to this registration statement:
(i)
To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii)
To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding
the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the
effective registration statement.
(iii)
To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
(2)
That,
for
the purpose of determining any liability under the Securities Act of 1933,
each
such post effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3)
To
remove
from registration by means of a post effective amendment any of the securities
being registered which remain unsold at the termination of the
offering.
(4)
To
file a
post-effective amendment to the registration statement to include any financial
statements required by Item 8.A of Form 20-F at the start of any delayed
offering or throughout a continuous offering.
(5)
That,
for
the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
(i)
If
the
registrant is relying on Rule 430B:
(A)
Each
prospectus filed by the registrant pursuant to Rule 424 (b) (3) shall be deemed
to be part of the registration statement as of the date the filed prospectus
was
deemed part of and included in the registration statement; and
(B)
Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7)
as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(l)(i), (vii), or (x) for the purpose
of
providing the information required by section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the registration statement
as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter,
such
date shall, be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall
be
deemed to be the initial bona fide offering thereof.
Provided,
however
,
that no
statement made in a registration statement or prospectus that is part of the
registration; statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus that
is
part of the registration statement will, as to a purchaser with a time of
contract of sale prior to such effective date, supersede or modify any statement
that was made in the registration statement or prospectus that was part of
the
registration statement or made in any such document immediately prior to such
effective date; or
(ii)
If
the
registrant is subject to Rule 430C, each prospectus filed pursuant to Rule
424
(b) as part of a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than prospectuses filed
in
reliance on Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after effectiveness.
Provided,
however
,
that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of
the
registration statement will, as to a purchaser with a time of contract of sale
prior to such first use, supersede or modify any statement that was made in
the
registration statement or prospectus that was part of the registration statement
or made in any such document immediately prior to such date of first
use.
(6)
That,
for
the purpose of determining liability of the registrant under the Securities
Act
of 1933 to any purchaser in the initial distribution of the
securities:
The
undersigned registrant undertakes that in a primary offering of securities
of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if
the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i)
Any
preliminary prospectus or prospectus of the undersigned registrant relating
to
the offering required to be filed pursuant to Rule 424;
(ii)
Any
free
writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant;
(iii)
The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(iv)
Any
other
communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
The
undersigned registrant hereby undertakes as follows: that prior to any public
reoffering of the securities registered hereunder through use of a prospectus
which is a part of this registration statement, by any person or party who
is
deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by
the
other items of the applicable form.
The
registrant undertakes that every prospectus: (1) that is filed pursuant to
the
immediately preceding paragraph, or (2) that purports to meet the requirements
of Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act
of
1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona
fide offering thereof.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of
such issue.
The
undersigned registrant hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Item 4, 10(b),
11, or 13 of this Form, within one business day of receipt of such request,
and
to send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents filed subsequent to
the
effective date of the registration statement through the date of responding
to
the request.
The
undersigned registrant hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
SIGNATURES
Pursuant
to the requirements of the Securities Act, the registrant has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of San Diego, State of California on March 29,
2006.
| HLS SYSTEMS INTERNATIONAL, LTD | ||
|
|
|
|
| By: | /s/ Li Zhang | |
|
Li Zhang |
||
| Chief Executive Officer | ||
Pursuant
to the Securities Act of 1933, this registration statement has been signed
by
the following persons in the capacities and on the dates indicated.
|
Signature
|
Title(s)
|
Date
|
|
Richard
D. Propper
|
Chairman
of the Board
|
March
29, 2006
|
|
Li
Zhang
|
Chief
Executive Officer and Director
(Principal
Executive Officer)
|
March
29, 2006
|
|
Kerry
S. Propper
|
Chief
Financial Officer, Secretary and Director
(Principal
Accounting Officer)
|
March
29, 2006
|
|
Jiangnan
Huang
|
Executive
Vice President and Director
|
March
29, 2006
|
Annex A
STOCK PURCHASE AGREEMENT
AMONG
CHARDAN NORTH CHINA ACQUISITION CORPORATION,
SHANGHAI JINQIAOTONG INDUSTRIAL DEVELOPMENT CO., WANG CHANGLI,
CHENG WUSI, LOU AN, TEAM SPIRIT INDUSTRIAL
LIMITED, OSCAF INTERNATIONAL CO.
------------------------------------
DATED: FEBRUARY 2, 2006
------------------------------------
TABLE OF CONTENTS
PAGE
ARTICLE I THE HOLLYSYS STOCK PURCHASE.......................................2
1.1 Purchase and Sale..............................................2
1.2 Purchase Price.................................................3
1.3 Earn-Out Agreement.............................................4
ARTICLE II THE CLOSING.......................................................4
2.1 The Closing....................................................4
2.2 Deliveries.....................................................5
2.3 Additional Agreements..........................................5
2.4 Further Assurances.............................................5
ARTICLE III REPRESENTATIONS AND WARRANTIES RELATING TO THE HOLLYSYS
STOCKHOLDERS, HOLLYSYS HOLDINGS...................................5
3.1 The HollySys Stock.............................................6
3.2 Organization of HollySys Holdings..............................6
3.3 Authority and Corporate Action; No Conflict....................6
3.4 Consents and Approvals.........................................7
3.5 Licenses, Permits, Etc.........................................7
3.6 Taxes, Tax Returens and Audits ................................8
3.7 Compliance with Law............................................8
3.8 Litigation.....................................................8
3.9 Records .......................................................8
3.10 Brokers........................................................8
3.11 Disclosure.....................................................8
3.12 Acquisition of Chardan Sub Stock...............................9
3.13 Survival of Representations and Warranties.....................9
ARTICLE IV REPRESENTATION AND WARRANTIES RELATING TO BJ HLS,
HZ HLS AND HOLLYSYS SUBSIDIARY...................................10
4.1 The HollySys Subsidiary Stock.................................10
4.2 Organization of HollySys Subsidiary...........................10
4.3 No Conflict...................................................10
4.4 Consents and Approvals........................................11
4.5 Financial Statements..........................................11
4.6 No Undisclosed Liabilities....................................11
4.7 Real Property.................................................12
4.8 Certain Personal Property.....................................12
4.9 Non-Real Estate Leases........................................12
4.10 Accounts Receivable...........................................12
4.11 Inventory.....................................................12
4.12 Contracts, Obligations and Commitments........................12
4.13 Licenses, Permits, Etc........................................13
4.14 Intellectual Property Rights..................................14
A-i
TABLE OF CONTENTS
(continued)
4.15 Title to and Condition of Assets..............................16
4.16 Taxes, Tax Returns and Audits.................................17
4.17 Absence of Certain Changes....................................18
4.18 Employee Plans; Labor Matters.................................19
4.19 Compliance with Law...........................................19
4.20 No Illegal or Improper Transactions...........................20
4.21 Related Transactions..........................................20
4.22 Records.......................................................20
4.23 Insurance.....................................................20
4.24 Litigation....................................................20
4.25 Settled Litigation............................................21
4.26 Brokers.......................................................21
4.27 Affiliates....................................................21
4.28 Disclosure....................................................21
4.29 Survival of Representations and Warranties....................21
ARTICLE V REPRESENTATIONS AND WARRANTIES OF CNCAC..........................21
5.1 Organization..................................................21
5.2 Capitalization................................................22
5.3 Authority and Corporate Action; No Conflict...................22
5.4 Consents and Approvals........................................23
5.5 Valid Issuance of Chardan Sub Stock...........................23
5.6 Financial Statements..........................................24
5.7 SEC Reports...................................................24
5.8 Trust Fund....................................................24
5.9 No Undisclosed Liabilities....................................24
5.10 Absence of Certain Changes....................................25
5.11 Compliance with Law...........................................26
5.12 Litigation....................................................26
5.13 Brokers.......................................................26
5.14 Survival of Representations and Warranties....................26
5.15 Records.......................................................26
5.16 Disclosure....................................................26
ARTICLE VI COVENANTS REGARDING HOLLYSYS, HOLLYSYS SUBSIDIARY AND THE
HOLLYSYS STOCKHOLDERS...........26
6.1 Conduct of the Business.......................................26
6.2 Access to Information.........................................28
6.3 Insurance.....................................................28
6.4 Protection of Confidential Information; Non-Competition.......28
6.5 Post-Closing Assurances.......................................30
6.6 No Other Negotiations.........................................30
6.7 No Securities Transactions....................................30
6.8 Fulfillment of Conditions.....................................30
A-ii
TABLE OF CONTENTS
(continued)
6.9 Disclosure of Certain Matters.................................31
6.10 Regulatory and Other Authorizations; Notices and Consents.....31
6.11 Use of Intellectual Property..................................31
6.12 Related Tax...................................................32
6.13 HollySys Acquisition..........................................32
6.14 HollySys Holdings.............................................32
6.15 HollySys Proxy Information....................................32
6.16 Interim Financial Information.................................32
ARTICLE VII COVENANTS OF CNCAC...............................................33
7.1 Conduct of the Business.......................................33
7.2 Stockholder Meeting...........................................34
7.3 Fulfillment of Conditions.....................................34
7.4 Disclosure of Certain Matters.................................35
7.5 Chardan Sub Incorporation.....................................35
7.6 Post-Closing Assurances.......................................35
7.7 Regulatory and Other Authorizations; Notices and Consents.....35
7.8 Books and Records.............................................35
7.9 Nasdaq Listing................................................36
ARTICLE VIII ADDITIONAL COVENANTS OF THE PARTIES..............................36
8.1 Other Information.............................................36
8.2 Mail Received After Closing...................................36
8.3 Further Action................................................37
8.4 Schedules.....................................................37
8.5 Execution of Agreements.......................................37
8.6 Confidentiality...............................................37
8.7 Public Announcements..........................................37
8.8 Board of Chardan Sub..........................................38
8.9 Stock Option Pool.............................................38
8.10 HollySys Stock Acquisition....................................38
ARTICLE IX CONDITIONS TO CLOSING............................................38
9.1 Conditions to Each Party's Obligations........................38
9.2 Conditions to Obligations of HollySys, HollySys
Subsidiary and the HollySys Stockholders......................39
9.3 Conditions to Obligations of CNCAC............................40
ARTICLE X INDEMNIFICATION..................................................42
10.1 Indemnification by HollySys Stockholders......................42
10.2 Indemnification by CNCAC......................................42
10.3 Notice, Etc...................................................43
10.4 Limitations...................................................43
10.5 Adjustment to Purchase Price; Setoff..........................44
10.6 Claims on behalf or in right of CNCAC and Chardan Sub.........44
A-iii
TABLE OF CONTENTS
(continued)
ARTICLE XI TERMINATION AND ABANDONMENT......................................45
11.1 Methods of Termination........................................45
11.2 Effect of Termination.........................................46
11.3 No Claim Against Trust Fund...................................46
ARTICLE XII DEFINITIONS......................................................47
12.1 Certain Defined Terms.........................................47
ARTICLE XIII GENERAL PROVISIONS...............................................49
13.1 Expenses......................................................49
13.2 Notices.......................................................50
13.3 Amendment.....................................................50
13.4 Waiver........................................................50
13.5 Headings......................................................51
13.6 Severability..................................................51
13.7 Entire Agreement..............................................51
13.8 Benefit.......................................................51
13.9 Governing Law.................................................51
13.10 Counterparts..................................................51
13.11 Approval of Contemporaneous Transactions......................51
A-iv
LIST OF EXHIBITS
Exhibit A - HollySys Subsidiary Matters
Exhibit B - HollySys Stockholders
Exhibit C - Beneficiaries of Purchase Price
Exhibit D - Chardan Sub Merger Agreement
Exhibit E - Form of Stock Consignment Agreement
Exhibit F - Form of Employment Agreement
A-v
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT, is entered into as of February 2, 2006,
among CHARDAN NORTH CHINA ACQUISITION CORPORATION, a Delaware corporation
("CNCAC"), SHANGHAI JINQIAOTONG INDUSTRIAL DEVELOPMENT CO., a Chinese
corporation, WANG CHANGLI, an individual, CHENG WUSI, an individual, LOU AN, an
individual, TEAM SPIRIT INDUSTRIAL LIMITED, a British Virgin Islands
corporation, and OSCAF INTERNATIONAL CO., a Cayman Islands corporation, with
respect to the following facts:
Capitalized terms used herein that are not otherwise defined shall have
the meanings ascribed to them in Article XII hereof.
WHEREAS, Beijing HollySys Co., Ltd., a company incorporated in PRC with
limited liability ("BJ HLS"), and Hangzhou HollySys Automation Co., Ltd., a
company incorporated in PRC with limited liability ("HZ HLS") (and collectively
with BJHLS, "HollySys"), on their own behalf and through Beijing HollySys
Haotong Science & Technology Development Co., Ltd. ("HollySys Subsidiary"), owns
and operates in the Peoples Republic of China ("PRC") the Business; and
WHEREAS, subject to the terms and conditions of this Agreement, BJ HLS and
HZ HLS, directly own the percentage interests set forth on Exhibit A of the
shares of capital stock of the HollySys Subsidiary ("HollySys Subsidiary
Stock"), and through such ownership have full right and title to benefit from
the long term investments in HollySys Subsidiary; and
WHEREAS, the HollySys Stockholders listed on Exhibit B hereto ("HollySys
Stockholders") are (or will be at Closing) the ultimate and beneficial owners
(through various BVI companies set up by the HollySys Stockholders) of 100% of
the outstanding capital stock of Gifted Time Holdings Limited, a holding company
to be formed as a British Virgin Islands corporation ("HollySys Holdings"). The
HollySys Stockholders in the context of this Agreement will respectively refer
to the HollySys Stockholders and/or their BVI companies, as the case may be; and
WHEREAS, the HollySys Stockholders are the direct and beneficial owners of
74.11% of the outstanding capital stock of BJ HLS (including by means of nominee
arrangements, trust, stock power or similar arrangements) and 60% of the
outstanding capital stock of HZ HLS respectively (together all stock and other
rights or arrangements are referred to as the "HollySys Stock"); and
A-1
WHEREAS, prior to the Closing, Team Spirit Industrial Limited and OSCAF
International Limited will transfer the ownership interests they hold in HZ HLS
to HollySys Holdings, and the rest of HollySys Stockholders will consign all the
equity interests (including but not limited to the voting rights, property
rights, preemptive rights and any other stockholders' rights derived from the
ownership of the shares in HollySys) they hold in BJ HLS to HollySys Holdings;
and
WHEREAS, subject to the terms and conditions of this Agreement, CNCAC at
the Closing, shall acquire by an issuance of capital stock and payment of cash,
all of the HollySys Holdings Stock and the actual control over the HollySys
Stock consigned by certain of the HollySys Stockholders to HollySys Holdings as
set forth in Section 2.3(b), plus the right to acquire all of the HollySys
shares owned by Wang Changli (collectively, the "HollySys Holdings Stock
Purchase"); and
WHEREAS, subject to the terms and conditions of this Agreement, CNCAC will
form a wholly owned subsidiary pursuant to the corporate laws of the British
Virgin Islands ("Chardan Sub") and simultaneously with the Closing hereunder
consummate a plan of merger ("Plan of Merger") pursuant to which CNCAC will be
merged with and into Chardan Sub (the "Chardan Merger"); and
WHEREAS, after the Closing, each of HollySys Stockholders who participated
in the HollySys Holdings Stock Purchase by a consignment and HollySys Holdings
shall use their best efforts to complete the acquisition of the ownership of
HollySys Stock by HollySys Holdings from such HollySys Stockholders ("HollySys
Stocks Acquisition") as soon as possible;
WHEREAS, since the business of BJ HLS and HZ HLS has grown rapidly in the
last few years (with revenues more than doubling from the fiscal year ended June
30, 2003 to the fiscal year ended June 30, 2005, and with net income increasing
by more than six times during the same period) and in recognition of the various
opportunities for significant growth ahead, the parties believe that the payment
of the earnout specified in Section 1.3 is a fair means of adjusting the
purchase price payable to the HollySys Stockholders in the event that the future
operating results of BJ HLS and HJ HLS demonstrate that the value of the
business acquired was greater than the payments set forth in Section 0 below;
and
WHEREAS, the Board of Directors of CNCAC has determined that it is
advisable and in the best interests of the stockholders of CNCAC for CNCAC to
enter into this Stock Purchase Agreement and to consummate the transactions
contemplated herein; and
WHEREAS, each of the HollySys Stockholders has determined that it is
advisable and in the best interests of such person to enter into this Stock
Purchase Agreement and to consummate the transactions contemplated herein.
NOW THEREFORE, in consideration of the foregoing and the following
covenants, the Parties hereby agree as follows:
ARTICLE I
THE HOLLYSYS STOCK PURCHASE
1.1 PURCHASE AND SALE. Upon the terms and subject to the conditions
hereof, at the Closing, the HollySys Stockholders shall sell, transfer, assign
and convey to Chardan Sub, and Chardan Sub shall purchase from the HollySys
Stockholders, all of the right, title and interest of the HollySys Stockholders
in and to the HollySys Holdings Stock as more fully set forth on Exhibit B.
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1.2 PURCHASE PRICE.
(a) Subject to adjustment as hereinafter set forth, the aggregate
purchase price ("Purchase Price") to be paid by Chardan Sub to the HollySys
Stockholders or their respective designees for the HollySys Holdings Stock shall
be the following:
(i) $30,000,000 as set forth in Section 0 below and as subject
to adjustment as provided for therein;
(ii) certificates representing, in the aggregate, 23,500,000
shares of Chardan Sub's ordinary shares, par value $0.0001 per share ("Chardan
Sub Stock"), which will represent no less than 77% of the total outstanding
equity capital of Chardan Sub following the Chardan Merger, to be delivered to
the HollySys Stockholders and their designees; it being understood that in the
event that no stockholders of CNCAC exercise their rights of redemption and all
outstanding warrants of CNCAC are exercised (but assuming no other issuance of
stock by Chardan Sub) then the Chardan Sub Stock issued to the HollySys
Stockholders will represent no less than 54.9% of the outstanding equity capital
of Chardan Sub following the Chardan Merger.
(iii) any additional shares issuable by Chardan Sub as set
forth in Section 0 below on the basis of the After-Tax-Profit of Chardan Sub as
provided for therein.
(b) Payments.
(i) Initial Payment. At the Closing, the sum of $30,000,000
minus the Remaining Payment (such difference, the "Initial Payment"), will be
paid by wire transfer of immediately available United States dollars to the
HollySys Stockholders or their designees as specified in a written notice given
to CNCAC, no later than two business days prior to the Closing, for the purpose
of the acquisition of the HollySys Holdings Stock and the related consignments.
(ii) Remaining Payment. The Remaining Payment shall equal the
sum of (i) $3,000,000, plus (ii) two-thirds of the amount by which the funds in
the CNCAC trust account (following the exercise of any redemption rights by the
stockholders of CNCAC) is less than $30,000,000. (For example: (a) if the amount
of such trust account after all redemptions is $24,000,000, then the Remaining
Payment shall equal $7,000,000 ($3,000,000 plus 2/3 of $6,000,000); (b) if the
amount in the trust account after all redemptions is $27,000,000, then the
Remaining Payment shall equal $5,000,000 ($3,000,000 plus 2/3 of $3,000,000);
(c) and if the amount in the trust account after all redemptions is at least
$30,000,000, then the Remaining Payment shall equal $3,000,000 ($3,000,000 plus
$0)). In the event that any of the following events occurs any time after the
Closing, CNCAC and Chardan Sub shall promptly pay the Remaining Payment or any
part of the Remaining Payment then available to the HollySys Stockholders or
their designees by wire transfer:
(A) If Chardan Sub receives at least $60,000,000 in
gross proceeds in additional financing as a result of (1) the call of CNCAC's
presently outstanding warrants (which such warrants will be assumed by Chardan
Sub at the Closing), (2) Chardan Sub's successful completion of a secondary
offering, or (3) the private investment into Chardan Sub by a strategic
investor.
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(B) If HollySys Holdings generates a net positive cash
flow in any fiscal year beginning with the fiscal year ending June 30, 2006, the
HollySys Stockholders shall be entitled to receive 50% of the net positive cash
flow until a total of the Remaining Payment has been received.
In the event that any of the events (A) or (B) occurs, the total sum of
the unpaid balance of the Remaining Payments shall be paid by Chardan Sub. In
the event of any partial payment of the Remaining Payment, any subsequent
payments shall be limited by the unpaid balance of the Remaining Payment.
(c) Allocation. All payments of the Initial Payment and the
Remaining Payment shall be made in proportion as requested by the HollySys
Stockholders as set forth on Exhibit C.
1.3 EARN-OUT AGREEMENT. So long as Chardan Sub, following the Closing, on
a consolidated basis, achieves or exceeds the After-Tax Profits (as defined
below) targets calculated for the period of July 1 to the succeeding June 30,
ending on June 30 in each of 2007, 2008, 2009 and 2010 as set forth below the
HollySys Stockholders (or their designees) shall receive the number of shares of
Chardan Sub Stock set forth in Schedule 1.3. The payment of these additional
shares is not contingent upon the continued employment or other relationships of
any HollySys Stockholder with any entity. Such additional shares shall be issued
within 90 days after June 30. The value of shares payable under Section 0 shall
also be available for indemnification pursuant to Section 0.
AFTER TAX PROFIT TARGETS FOR 12 MONTHS ENDING
--------------------------------------------------------------------------------
JUNE 30, 2007 JUNE 30, 2008 JUNE 30, 2009 JUNE 30, 2010
$23,000,000 $32,000,000 $43,000,000 $61,000,000
After Tax Profit shall be computed using the generally accepted accounting
principles that were used for purpose of preparing the 2005 Financial Statements
of HollySys; provided, however, that the computation shall exclude (i) any
after-tax profits from any acquisition by Chardan Sub or its subsidiaries that
involved the issuance of securities that has a dilutive effect on the holders of
common stock of Chardan Sub, and (ii) any expenses related to the issue of the
aforesaid shares by Chardan Sub under this Section 1.3.
ARTICLE II
THE CLOSING
2.1 THE CLOSING. Subject to the terms and conditions of this Agreement,
the consummation of the HollySys Holdings Stock Purchase and the transactions
contemplated by this Agreement shall take place at a closing ("Closing") to be
held at 10:00 a.m., local time, on the fourth business day after the date on
which the last of the conditions to Closing set forth in Article IX is
fulfilled, at the offices of DLA Piper Rudnick Gray Cary US LLP, 4365 Executive
Drive Suite 1100, San Diego, CA 92121, or at such other time, date or place as
the Parties may agree upon in writing. The date on which the Closing occurs is
referred to herein as the "Closing Date."
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2.2 DELIVERIES.
(a) HollySys Stockholders. At the Closing, each HollySys Stockholder
will (i) assign and transfer to Chardan Sub all of such HollySys Stockholder's
right, title and interest in and to his, her or its respective portion of the
HollySys Holdings Stock by delivering to Chardan Sub the certificates
representing such HollySys Holdings Stock, duly endorsed for transfer and free
and clear of all liens and (ii) deliver to Chardan Sub the certificates,
opinions and other agreements contemplated by Article IX hereof and the other
provisions of this Agreement.
(b) Chardan Sub. At the Closing, Chardan Sub shall deliver to the
HollySys Stockholders (i) the cash and shares of Chardan Sub Stock representing
the Purchase Price to which each of the HollySys Stockholders is entitled
pursuant to Section 0, and (ii) the certificates, opinions and other agreements
and instruments contemplated by Article IX hereof and the other provisions of
this Agreement.
2.3 ADDITIONAL AGREEMENTS. At the Closing, the following agreements will
have been executed and delivered (collectively, the "Transaction Documents"),
the effectiveness of each of which is subject to the Closing:
(a) a Merger Agreement between CNCAC and Chardan Sub in a form to be
attached as Exhibit D hereto, to become effective immediately after the closing;
and
(b) the Stock Consignment Agreements in the forms attached hereto as
Exhibit E between HollySys Holdings and Shanghai Jinqiaotong Industrial
Development Co., Wang Changli, Cheng Wusi and Lou An.
2.4 FURTHER ASSURANCES. Subject to the terms and conditions of this
Agreement, at any time or from time to time after the Closing, each of the
Parties hereto shall execute and deliver such other documents and instruments,
provide such materials and information and take such other actions as may
reasonably be necessary, proper or advisable, to the extent permitted by law, to
fulfill its obligations under this Agreement and the other Transaction Documents
to which it is a party.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
RELATING TO THE HOLLYSYS STOCKHOLDERS AND HOLLYSYS HOLDINGS
The HollySys Stockholders, jointly and severally, represent and warrant to
CNCAC and Chardan Sub as follows:
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3.1 THE HOLLYSYS STOCK.
(a) Ownership. The HollySys Stockholders are the registered and
beneficial owners of the shares of BJ HLS and HZ HLS in the amounts set forth in
Schedule 3.1(a), free and clear of all Liens, except as set forth in Schedule
3.1(a), which shares constitute 74.11% and 60% of the outstanding shares of
capital stock of BJ HLS and HZ HLS, respectively. BJ HLS owns 40% of the
outstanding shares of capital stock of HZ HLS. At the Closing, the HollySys
Stockholders will be the registered and beneficial owners of the shares of
HollySys Holdings Stock in the amounts set forth in Schedule 3.1(a), free and
clear of all Liens, except as set forth in Schedule 3.1(a), which shares will
constitute all of the outstanding shares of capital stock of HollySys Holdings.
At the Closing, the HollySys Stockholders (other than Team Spirit Industrial
Limited and OSCAF International Co.) shall consign all the equity interests and
preemptive rights derived from the HollySys Stock, with Team Spirit Industrial
Limited and OSCAF International Co. having transferred to HollySys Holdings
prior to Closing all of the outstanding shares of capital stock of HZ HLS that
such entities own. There are no options, warrants or other contractual rights
outstanding which give any Person the right to acquire shares of BJ HLS or HZ
HLS owned by the HollySys Stockholders, whether or not such rights are presently
exercisable. There are no disputes, arbitrations or litigation proceedings with
respect to the common stock and outstanding warrants, options and other rights
relating to the capital stock of HollySys Holdings.
(b) Capitalization. The authorized capital stock of BJ HLS and HZ
HLS is set forth in Schedule 3.1(b). All of the outstanding shares of BJ HLS and
HZ HLS Stock are (and all of the outstanding shares of HollySys Holdings will
be) validly issued, fully paid and non-assessable. There are no options,
warrants or other contractual rights outstanding which give any Person the right
to require the issuance of any capital stock of BJ HLS, HZ HLS or HollySys
Holdings, whether or not such rights are presently exercisable.
3.2 ORGANIZATION OF HOLLYSYS HOLDINGS. HollySys Holdings is or will be an
international business company duly organized, validly existing and in good
standing under the law of the British Virgin Islands. HollySys Holdings is duly
qualified to do business as an independent corporation and is in good standing
in each of the jurisdictions in the respective property owned, leased or
operated by it or the nature of the business which it conducts requires
qualification (which jurisdictions are listed in Schedule 3.2), or if not so
qualified, such failure or failures, singly or in the aggregate, would not have
a material adverse effect on the Business, assets, operations, financial
condition, liquidity or prospects of HollySys Holdings, BJ HLS and HZ HLS or the
HollySys Subsidiary, separately and as a whole ("HollySys Material Adverse
Effect"). HollySys Holdings has all requisite power and authority to own, lease
and operate its properties and to carry on its business as now being conducted
and as presently contemplated to be conducted.
3.3 AUTHORITY AND CORPORATE ACTION; NO CONFLICT.
(a) Each of the HollySys Stockholders has all necessary power and
authority to enter into this Agreement and the other Transaction Documents to
which it is a party and to consummate the HollySys Holdings Stock Purchase and
other transactions contemplated hereby and thereby. All action, corporate and
otherwise, necessary to be taken by HollySys Holdings and the HollySys
Stockholders to authorize the execution, delivery and performance of this
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Agreement, the Transaction Documents and all other agreements and instruments
delivered by HollySys Holdings and the HollySys Stockholders in connection with
the HollySys Holdings Stock Purchase has been duly and validly taken. This
Agreement and the Transaction Documents to which HollySys Holdings and each
HollySys Stockholder is a party has been duly executed and delivered by HollySys
Holdings and each HollySys Stockholder and constitutes the valid, binding, and
enforceable obligation of HollySys and each HollySys Stockholder, enforceable in
accordance with its terms, except (i) as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or similar laws of general application now or hereafter in effect
affecting the rights and remedies of creditors and by general principles of
equity (regardless of whether enforcement is sought in a proceeding at law or in
equity) and (ii) as enforceability of any indemnification provision may be
limited by federal and state securities laws and public policy of the United
States, BVI and PRC.
(b) Neither the execution and delivery of this Agreement or any of
the other Transaction Documents contemplated hereby by HollySys Holdings or each
HollySys Stockholder nor the consummation of the transactions contemplated
hereby or thereby will (i) except as set forth in Schedule 3.3(b), conflict
with, result in a breach or violation of or constitute (or with notice of lapse
of time or both constitute) a default under, (A) the Memorandum and Articles of
Association of HollySys Holdings, (B) the charter documents of HollySys
Holdings, or (C) any law, statute, regulation, order, judgment or decree or any
instrument, contract or other agreement to which HollySys Holdings or a HollySys
Stockholder is a party or by which it (or any of its properties or assets) is
subject or bound; (ii) result in the creation of, or give any party the right to
create, any lien, charge, option, security interest or other encumbrance upon
the assets of HollySys Holdings, BJ HLS, HZ HLS or a HollySys Stockholder; (iii)
terminate or modify, or give any third party the right to terminate or modify,
the provisions or terms of any contract to which HollySys Holdings or a HollySys
Stockholder is a party; or (iv) result in any suspension, revocation,
impairment, forfeiture or nonrenewal of any permit, license, qualification,
authorization or approval applicable to HollySys Holdings or a HollySys
Stockholder.
3.4 CONSENTS AND APPROVALS. Other than as set forth on Schedule 3.4, the
execution and delivery of this Agreement and the Transaction Documents by each
HollySys Stockholder does not, and the performance of this Agreement and the
Transaction Documents by HollySys Holdings or them will not, require any
consent, approval, authorization or other action by, or filing with or
notification to, any Governmental Authority, except where failure to obtain such
consents, approvals, authorizations or actions, or to make such filings or
notifications, would not prevent it from performing any of its material
obligations under this Agreement and the Transaction Documents and would not
have a HollySys Material Adverse Effect.
3.5 LICENSES, PERMITS, ETC. To the best of the knowledge of each HollySys
Stockholder, HollySys Holdings possesses or will possess prior to the Closing
all Permits necessary, in all material respects, to own and hold its interests
in the Business , which necessary Permits are described or are as set forth on
Schedule 3.5 hereto. True, complete and correct copies of Permits issued to
HollySys Holdings have previously been delivered to CNCAC. To the best of the
knowledge of each HollySys Stockholder, HollySys Holdings is not in default in
any material respect under any of such Permits and no event has occurred and no
condition exists which, with the giving of notice, the passage of time, or both,
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would constitute a default thereunder. Neither the execution and delivery of
this Agreement, the Transaction Documents or any of the other documents
contemplated hereby nor the consummation of the transactions contemplated hereby
or thereby nor, to the best of the knowledge of each HollySys Stockholder,
compliance by HollySys Holdings with any of the provisions hereof or thereof
will result in any suspension, revocation, impairment, forfeiture or nonrenewal
of any Permit applicable to the Business.
3.6 TAXES, TAX RETURNS AND AUDITS. Except as specifically set forth in
Schedule 3.6, (i) HollySys Holdings has filed on a timely basis (taking into
account any extensions received from the relevant taxing authorities) all
returns and reports pertaining to all Taxes that are or were required to be
filed by HollySys Holdings with the appropriate taxing authorities in all
jurisdictions in which such returns and reports are or were required to be
filed, and all such returns and reports are true, correct and complete in all
material respects, (ii) all Taxes that are due from or may be asserted against
HollySys Holdings (including deferred Taxes) in respect of or attributable to
all periods ending on or before the Closing Date have been or will be fully
paid, deposited or adequately provided for on the books and financial statements
of HollySys Holdings or are being contested in good faith by appropriate
proceedings, (iii) no issues have been raised (or are currently pending) by any
taxing authority in connection with any of the returns and reports referred to
in clause (i) which might be determined adversely to HollySys Holdings, which
could have a HollySys Material Adverse Effect, (iv) HollySys Holdings has not
given or requested to give waivers or extensions of any statute of limitations
with respect to the payment of Taxes, and (v) no tax liens which have not been
satisfied or discharged by payment or concession by the relevant taxing
authority.
3.7 COMPLIANCE WITH LAW. The business of HollySys Holdings has been
conducted, and is now being conducted and will be conducted prior to Closing, in
compliance in all material respects with all applicable Laws. HollySys Holdings
and their respective officers, directors and employees (i) are not, and during
the periods of existence of HollySys Holdings, were not, in violation of, or not
in compliance with, in any material respect any such applicable Laws with
respect to the conduct of the businesses of HollySys Holdings; and (ii) have not
received any notice from any Governmental Authority, and to the best of the
knowledge of the HollySys Stockholders, none is threatened, alleging that
HollySys Holdings has violated, or not complied with, any applicable Laws.
3.8 LITIGATION. There are no actions, suits, arbitrations or other
proceedings pending or, to the best of the knowledge of the HollySys
Stockholders, threatened against HollySys Holdings at law or in equity before
any Governmental Authority. Neither HollySys Holdings, nor any of its properties
is subject to any order, judgment, injunction or decree.
3.9 RECORDS. The books of account, minute books, stock certificate books
and stock transfer ledgers of HollySys Holdings are complete and correct in all
material respects, and there have been no material transactions involving
HollySys Holdings which are required to be set forth therein and which have not
been so set forth.
3.10 BROKERS. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of HollySys Holdings or any HollySys Stockholder.
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3.11 DISCLOSURE. No representation or warranty by HollySys Holdings or any
HollySys Stockholder contained in this Agreement and no information contained in
any Schedule or other instrument furnished or to be furnished to CNCAC pursuant
to this Agreement or in connection with the transactions contemplated hereby
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary in order to make the statements
contained therein not misleading.
3.12 ACQUISITION OF CHARDAN SUB STOCK.
(a) Acquisition Entirely for Own Account. The Chardan Sub Stock to
be acquired by each HollySys Stockholder (or their respective designees) will be
acquired for investment for such HollySys Stockholder's or such designee's own
account and not with a view to the resale or distribution of any part thereof.
(b) Disclosure of Information. Each HollySys Stockholder
acknowledges that all of the SEC Reports (defined in Section 0) were fully
available to it, and each HollySys Stockholder has reviewed and understands such
reports. Each HollySys Stockholder acknowledges that it has received all the
information that it has requested relating to CNCAC, the acquisition of the
Chardan Sub Stock and the Chardan Merger. Each HollySys Stockholder further
represents that it has had an opportunity to ask questions and receive answers
from CNCAC regarding the terms and conditions of its acquisition of the Chardan
Sub Stock and the Chardan Merger.
(c) Accredited Investor. Each HollySys Stockholder is an "accredited
investor" within the meaning of Rule 501 of Regulation D under the Securities
Act.
(d) Restricted Securities. Each HollySys Stockholder understands
that it and its designees (if any) will acquire constitutes "restricted
securities" from Chardan Sub under the United States federal securities laws and
that under such laws and applicable regulations such securities may only be sold
in the United States pursuant to an effective registration statement or an
available exemption from registration. Each HollySys Stockholder understands
that the currently available exemption from registration under Rule 144 requires
the securities to be held for one year before they can be sold in the United
States.
(e) Legends. It is understood that the certificates evidencing the
Chardan Sub Stock shall bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"). THE SECURITIES REPRESENTED HEREBY
MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT OR AN OPINION OF COUNSEL, REASONABLY
ACCEPTABLE TO COUNSEL FOR THE COMPANY, TO THE EFFECT
THAT THE PROPOSED SALE, TRANSFER, OR DISPOSITION MAY BE
EFFECTUATED WITHOUT REGISTRATION UNDER THE ACT."
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3.13 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of HollySys Holdings and each HollySys Stockholder set forth in
ARTICLE III of this Agreement shall survive the Closing for a period of four
years, except that the representations and warranties set forth in Sections 0,
0, 0, 3.4, 3.7, 0 and 0 shall survive without limitation as to time and the
representations and warranties set forth in Section 06 shall survive until the
expiration of the statute of limitations with respect to each respective Tax.
ARTICLE IV
REPRESENTATION AND WARRANTIES RELATING TO
BJ HLS, HZ HLS AND HOLLYSYS SUBSIDIARY
The HollySys Stockholders, jointly and severally, represent and warrant to
CNCAC and Chardan Sub as of the Closing, as follows:
4.1 THE HOLLYSYS SUBSIDIARY STOCK.
(a) Ownership. BJ HLS controls 70% of the shares of the HollySys
Subsidiary, free and clear of all Liens. Except as indicated in the preceding
sentence, there are no consignment, operational contracts and/or equity transfer
arrangements, options, warrants or other contractual rights (oral or written),
trusts or other arrangements of any nature which give any Person (other than
HollySys or HollySys Holdings) the right to acquire or control any capital stock
of HollySys Subsidiary, whether or not such rights are presently exercisable.
Except as indicated in the preceding sentence, there are no operational
contracts and/or equity transfer arrangements, options, warrants or other
contractual rights (oral or written), trusts or other arrangements of any nature
which give any Person (other than HollySys or HollySys Holdings) the right to
any asset, income, dividend, distribution, property interest or direct or
beneficial interest in any, or from any, of HollySys Subsidiary.
(b) Capitalization. The authorized capital stock of HollySys
Subsidiary is set forth on Exhibit A. All of the outstanding shares of capital
stock of HollySys Subsidiary are validly issued, fully paid and non-assessable.
4.2 ORGANIZATION OF BJ HLS, HZ HLS AND HOLLYSYS SUBSIDIARY. Each of BJ
HLS, HZ HLS and HollySys Subsidiary is a corporate entity duly organized,
validly existing and in good standing under the law of its jurisdiction of
incorporation as set forth on Schedule 4.2. Each of BJ HLS, HZ HLS and HollySys
Subsidiary is duly qualified to do business in the jurisdictions in which the
property owned, leased or operated by such entity or the nature of the business
which it conducts requires qualification (which jurisdictions are listed in
Schedule 4.2), or if not so qualified, such failure or failures, in the
aggregate, would not have a HollySys Material Adverse Effect. Neither BJ HLS, HZ
HLS nor HollySys Subsidiary owns, directly or indirectly, any capital stock or
any other securities of any issuer or any equity interest in any other entity
and is not a party to any agreement to acquire any such securities or interest,
except as set forth on Schedule 4.2. Each of BJ HLS, HZ HLS and HollySys
Subsidiary has all requisite power and authority to own, lease and operate its
properties and to carry on its respective business as now being conducted and as
presently contemplated to be conducted.
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4.3 NO CONFLICT. Neither the execution nor delivery of this Agreement or
any of the Transaction Documents or any of the other documents contemplated
thereby nor the consummation of the transactions contemplated thereby will (i)
except as set forth in Schedule 4.3, conflict with, result in a breach or
violation of or constitute (or with notice of lapse of time or both constitute)
a default under, (A) the charter documents of BJ HLS, HZ HLS or HollySys
Subsidiary or (B) any law, statute, regulation, order, judgment or decree or any
instrument, contract or other agreement to which BJ HLS, HZ HLS or HollySys
Subsidiary is a party or by which any of them (or any of the properties or
assets of BJ HLS, HZ HLS or HollySys Subsidiary) is subject or bound; (ii)
result in the creation of, or give any party the right to create, any lien,
charge, option, security interest or other encumbrance upon the assets of BJ
HLS, HZ HLS or HollySys Subsidiary; (iii) terminate or modify, or give any third
party the right to terminate or modify, the provisions or terms of any contract
to which BJ HLS, HZ HLS or HollySys Subsidiary is a party, or (iv) result in any
suspension, revocation, impairment, forfeiture or nonrenewal of any permit,
license, qualification, authorization or approval applicable to BJ HLS, HZ HLS
or HollySys Subsidiary.
4.4 CONSENTS AND APPROVALS. Except as listed and described on Schedule
4.4, the execution and delivery of the Transaction Documents by the HollySys
Stockholders do not, and the performance of the Transaction Documents by each of
them will not, require any consent, approval, authorization or other action by,
or filing with or notification to, any Governmental Authority, except where
failure to obtain such consents, approvals, authorizations or actions, or to
make such filings or notifications, would not prevent any of them from
performing any of their material obligations under the Transaction Documents and
would not cause a HollySys Material Adverse Effect.
4.5 FINANCIAL STATEMENTS. Prior to the execution of this Agreement,
HollySys has delivered to CNCAC consolidated balance sheets as at June 30, 2003,
2004 and 2005, and related consolidated statements of income and source and
application of funds for the three years ended June 30, 2005, audited by
HollySys's Accountants, and the notes, comments, schedules, and supplemental
data therein (collectively, the "2005 Financial Statements") and an interim
consolidated balance sheet as of September 30, 2005, and related consolidated
statements of income and source and application of funds for the three months
then ended, reviewed by HollySys's accountants (collectively, the "September
Financial Statements"). The 2005 Financial Statements and September Financial
Statements will be prepared in accordance with PRC GAAP reconciled to US GAAP or
prepared in accordance with US GAAP throughout the periods indicated and fairly
present the consolidated financial condition of HollySys at their respective
dates and the consolidated results of the operations of HollySys for the periods
covered thereby in accordance with PRC GAAP reconciled to US GAAP or in
accordance with US GAAP. The 2005 Financial Statements and September Financial
Statements are included in Schedule 4.5 of this Agreement.
4.6 NO UNDISCLOSED LIABILITIES. Neither BJ HLS, HZ HLS nor HollySys
Subsidiary has any liabilities, whether known or unknown, absolute, accrued,
contingent or otherwise, except (a) as and to the extent reflected or reserved
against on the September Financial Statements, (b) those since September 30,
2005, incurred in the ordinary course of business and consistent with prior
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practice, (c) liabilities which individually are less than $200,000, or (d)
liabilities disclosed (or exempt from disclosure) pursuant to sections 4.9,
4.12, 4.14, 4.16, or 4.24. The September Financial Statements and Schedule 4.6
together contain an accurate and complete list and description and all
liabilities of BJ HLS, HZ HLS and HollySys Subsidiary whether or not reflected
or reserved against on the September Financial Statements which individually
exceeds US $200,000 or, if related liabilities, exceed $200,000 (or the
equivalent of US $200,000).
4.7 REAL PROPERTY. The September Financial Statements and Schedule 4.7
together contain an accurate and complete list and description of all real
estate owned by BJ HLS, HZ HLS and HollySys Subsidiary as well as any other real
estate that is in the possession of or leased by BJ HLS, HZ HLS and HollySys
Subsidiary and the improvements (including buildings and other structures)
located on such real estate (collectively, the "Real Property"), and lists and
accurately describes any leases under which any such Real Property is possessed
(the "Real Estate Leases"). Neither BJ HLS, HZ HLS nor HollySys Subsidiary is in
default under any of the Real Estate Leases, and neither BJ HLS, HZ HLS nor
HollySys Subsidiary is aware of any default by any of the lessors thereunder.
4.8 CERTAIN PERSONAL PROPERTY. The September Financial Statements and
Schedule 4.8 together contain an accurate and complete list and description of
the material fixed assets of BJ HLS, HZ HLS and HollySys Subsidiary specifying
the location of all material items of tangible personal property of BJ HLS, HZ
HLS and HollySys Subsidiary that were included in its respective September
Financial Statements.
4.9 NON-REAL ESTATE LEASES. The September Financial Statements and
Schedule 4.9 together contain an accurate and complete list and description of
all assets and property (other than Real Property and Real Estate Leases) that
are used as of the date of this Agreement in the operation of the Business and
that are possessed by BJ HLS, HZ HLS or HollySys Subsidiary under an existing
lease. All of such leases are referred to herein as the "Non-Real Estate
Leases." Neither BJ HLS, HZ HLS nor HollySys Subsidiary is in default under any
of the Non-Real Estate Leases, and Neither BJ HLS, HZ HLS nor HollySys
Subsidiary is aware of any default by any of the lessors hereunder.
4.10 ACCOUNTS RECEIVABLE. The accounts receivable of HollySys, both (i) as
reflected on the September Financial Statements, and (ii) created after
September 30, 2005, are bona fide accounts receivable, created in the ordinary
course of business and subject to historical rates of uncollected liabilities,
as reserved against on the HollySys financial statements, are good and
collectible within periods of time normally prevailing in the industry at the
aggregate recorded amounts thereof.
4.11 INVENTORY. The inventory of HollySys and HollySys Subsidiary consists
of items of quality and quantity useable or saleable in the ordinary course of
business at regular sales prices, subject to (a) changes in price levels as a
result of economic and market conditions and (b) reserves reflected in the
respective September Financial Statements for spoiled and discontinued items.
4.12 CONTRACTS, OBLIGATIONS AND COMMITMENTS. Except as set forth in the
September Financial Statements and on Schedule 4.12 together, other than the
Real Estate Leases and the Non-Real Estate Leases, neither BJ HLS, HZ HLS nor
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HollySys Subsidiary has any existing contract, obligation or commitment (written
or oral) of any nature (other than obligations involving payments of less than
$500,000 individually), including without limitation the following:
(a) Employment, bonus, severance or consulting agreements,
retirement, stock bonus, stock option, or similar plans;
(b) Loans or other agreements, notes, indentures or instruments
relating to or evidencing indebtedness for borrowed money or mortgaging,
pledging or granting or creating a lien or security interest or other
encumbrance on any of the assets of BJ HLS, HZ HLS or HollySys Subsidiary or any
agreement or instrument evidencing any guaranty by BJ HLS, HZ HLS or HollySys
Subsidiary of payment or performance by any other Person;
(c) Agreements of any kind relating to employment matters such as
labor agreements or agreements providing for benefits under any plan;
(d) Any contract or series of contracts with the same Person for the
furnishing or purchase of equipment, goods or services, except for purchase and
sales orders in the ordinary course of business;
(e) Any joint venture contract or arrangement or other agreement
involving a sharing of profits or expenses to which BJ HLS, HZ HLS or HollySys
Subsidiary is a party or by which it is bound;
(f) Agreements which limit the freedom of BJ HLS, HZ HLS or HollySys
Subsidiary to compete in any line of business or in any geographic area or with
any Person;
(g) Agreements providing for disposition of the assets, businesses
or a direct or indirect ownership interest in BJ HLS, HZ HLS or HollySys
Subsidiary;
(h) Any contract, commitment or arrangement not made in the ordinary
course of business of BJ HLS, HZ HLS or HollySys Subsidiary; or
(i) Agreements with any Governmental Authority.
Except as set forth on Schedule 4.12, each Contract to which BJ HLS, HZ HLS or
HollySys Subsidiary is a party is a valid and binding obligation of such party
and, to the best of the knowledge of BJ HLS, HZ HLS, HollySys Subsidiary and the
HollySys Stockholders, is enforceable in accordance with its terms (except as
the enforceability thereof may be limited by any applicable bankruptcy,
insolvency or other laws affecting creditors' rights generally or by general
principles of equity, regardless of whether such enforceability is considered in
equity or at law), and is in full force and effect (except for any Contracts
which by their terms expire after the date hereof or are terminated after the
date hereof in accordance with the terms thereof, provided, however, that
neither BJ HLS, HZ HLS nor HollySys Subsidiary will terminate any Contract after
the date hereof without the prior written consent of CNCAC, which consent shall
not be unreasonably withheld or delayed), and neither BJ HLS, HZ HLS nor
HollySys Subsidiary has breached any material provision of, nor is in default in
any material respect under the terms of any of the Contracts.
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4.13 LICENSES, PERMITS, ETC. Schedule 4.13 contains an accurate and
complete list and description of all material Permits used in or necessary for
the ownership and operation of the Business, and true, complete and accurate
copies of all Permits previously have been delivered to CNCAC. BJ HLS, HZ HLS
and HollySys Subsidiary possesses all Permits necessary, in all material
respects, to own and operate its portion of the Business. All such Permits are
in full force and effect and BJ HLS, HZ HLS and HollySys Subsidiary and the
officers, directors and employees of BJ HLS, HZ HLS and HollySys Subsidiary have
complied and BJ HLS, HZ HLS and HollySys Subsidiary will comply, and BJ HLS, HZ
HLS and HollySys Subsidiary shall cause its respective officers, directors and
employees to comply, in all material respects with all terms of such Permits and
will take any and all actions necessary to ensure that all such Permits remain
in full force and effect and that the terms of such Permits are not violated
through the Closing Date. Neither BJ HLS, HZ HLS nor HollySys Subsidiary is in
default in any material respect under any of such Permits and no event has
occurred and no condition exists which, with the giving of notice, the passage
of time, or both, would constitute a default thereunder. Neither the execution
and delivery of this Agreement, the Transaction Documents or any of the other
documents contemplated hereby nor the consummation of the transactions
contemplated hereby or thereby nor compliance by BJ HLS, HZ HLS and HollySys
Subsidiary with any of the provisions hereof or thereof will result in any
suspension, revocation, impairment, forfeiture or nonrenewal of any Permit
applicable to the Business. True, complete and correct copies of Permits issued
to BJ HLS, HZ HLS and HollySys Subsidiary have previously delivered to CNCAC.
4.14 INTELLECTUAL PROPERTY RIGHTS.
(a) Intellectual Property. Schedule 4.14(a) contains an accurate and
complete list and description of all Intellectual Property used by BJ HLS, HZ
HLS and HollySys Subsidiary in connection with the Business, specifying as to
each (i) the nature of such right, (ii) the ownership thereof, (iii) the
Governmental Authority that has issued or recorded a registration or certificate
or similar document with respect thereto or with which an application for such a
registration, certificate or similar document is pending and (iv) any applicable
registration, certificate or application number.
(b) Other Intellectual Property Rights. Schedule 4.14(b) includes an
accurate and complete list and description of all material inventions and trade
secrets that BJ HLS, HZ HLS and HollySys Subsidiary has formally documented and
that are owned, used, controlled, authorized for use or held by, or licensed to,
BJ HLS, HZ HLS and HollySys Subsidiary that relate to or are necessary to the
Business, including as conducted at or prior to Closing or as proposed to be
conducted by BJ HLS, HZ HLS and HollySys Subsidiary, together with a designation
of the ownership thereof.
(c) Software. Schedule 4.14(c) includes an accurate and complete
list and description of all Software used by BJ HLS, HZ HLS and HollySys
Subsidiary in connection with the Business, including as conducted at or prior
to Closing or as proposed to be conducted by BJ HLS, HZ HLS and HollySys
Subsidiary, together with a designation of ownership.
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(d) Out-Bound Licenses. Schedule 4.14(d) includes an accurate and
complete list and description of all licenses, sublicenses, and other Contracts
pursuant to which (i) any Person is authorized to use any Intellectual Property
rights used in connection with the Business or (ii) any right of BJ HLS, HZ HLS
or HollySys Subsidiary in, or such entity's use of, any Intellectual Property
right used in connection with the Business is otherwise materially affected.
(e) In-Bound Licenses. Schedule 4.14(e) includes an accurate and
complete list and description of all licenses, sublicenses, and other Contracts
pursuant to which BJ HLS, HZ HLS and HollySys Subsidiary is authorized to use,
or can be authorized to use (through, for example, the grant of a sublicense),
any Intellectual Property owned by any other Person (including any rights
enjoyed by BJ HLS, HZ HLS and HollySys Subsidiary by reason of its relationship
with one of its affiliates) in connection with the Business.
(f) Ownership. As of the date hereof, BJ HLS, HZ HLS and HollySys
Subsidiary owns, and at the Closing Date, will own all right, title and interest
in and to all Intellectual Property rights used in connection with the Business,
and those Intellectual Property rights were developed and created solely by
employees of such entity acting within the scope of their employment or by third
parties (all of which employees and third parties have validly and irrevocably
assigned all of their rights therein to such entity) and BJ HLS, HZ HLS and
HollySys Subsidiary is duly and validly licensed to use all other Intellectual
Property used in connection with the Business, free and clear of royalties
(except as otherwise set forth in Schedule 4.14(g)). Neither BJ HLS, HZ HLS nor
HollySys Subsidiary has assigned or transferred ownership of, agreed to so
assign or transfer ownership of, or granted any exclusive license of or
exclusive right to use, any Intellectual Property used in connection with the
Business.
(g) Royalties. Except for licenses listed and accurately and
completely described on the September Financial Statements or Schedule 4.14(g)
as royalty-bearing, there are (and will be upon Closing) no royalties,
honoraria, fees, or other payments payable by BJ HLS, HZ HLS or HollySys
Subsidiary to any Person by reason of the ownership, use, license, sale, or
disposition of any Intellectual Property used in connection with the Business.
(h) Infringement. The Intellectual Property used in connection with
the Business by BJ HLS, HZ HLS and HollySys Subsidiary does not infringe or
misappropriate any Intellectual Property rights of any Person under the laws of
any jurisdiction.
No notice, claim or other communication (in writing or otherwise) has been
received from any Person: (A) asserting any ownership interest in any material
Intellectual Property used in connection with the Business; (B) asserting any
actual, alleged, possible or potential infringement, misappropriation or
unauthorized use or disclosure of any Intellectual Property used in connection
with the Business, defamation of any Person, or violation of any other right of
any Person (including any right to privacy or publicity) by BJ HLS, HZ HLS or
HollySys Subsidiary or relating to the Intellectual Property used in connection
with the Business; or (C) suggesting or inviting BJ HLS, HZ HLS or HollySys
Subsidiary to take a license or otherwise obtain the right to use any
Intellectual Property in connection with the Business. To the best of its
knowledge, no Person is infringing, misappropriating, using or disclosing in an
unauthorized manner any Intellectual Property used in connection with the
Business owned by, exclusively licensed to, held by or for the benefit of, or
otherwise controlled by BJ HLS, HZ HLS or HollySys Subsidiary.
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(i) Proceedings. Except as set forth on Schedule 4.14(i), there are
no current or, to the best of its knowledge, threatened Proceedings (including
but not limited to any interference, reexamination, cancellation, or opposition
proceedings) arising out of a right or claimed right of any person before any
Governmental Authority anywhere in the world related to any Intellectual
Property used in connection with the Business owned by, exclusively licensed to,
held by or for the benefit of, or otherwise controlled by BJ HLS, HZ HLS or
HollySys Subsidiary.
4.15 TITLE TO AND CONDITION OF ASSETS.
(a) BJ HLS, HZ HLS and HollySys Subsidiary has good and marketable
title to all the properties and assets owned by it. Except as set forth in the
September Financial Statements and Schedule 4.15 together, none of such
properties and assets is subject to any Lien, option to purchase or lease,
easement, restriction, covenant, condition or imperfection of title or adverse
claim of any nature whatsoever, direct or indirect, whether accrued, absolute,
contingent or otherwise.
(b) To the best knowledge of BJ HLS, HZ HLS and HollySys Subsidiary,
except as set forth in Schedule 4.15, all buildings, structures, improvements,
fixtures, facilities, equipment, all components of all buildings, structures and
other improvements included within the Real Property, including but not limited
to the roofs and structural elements thereof and the heating, ventilation, air
conditioning, plumbing, electrical, mechanical, sewer, waste water, storm water,
paving and parking equipment, systems and facilities included therein conform in
all material respects to all applicable Laws of every Governmental Authority
having jurisdiction over any of the Real Property, and every instrumentality or
agency thereof. There are no unsatisfied requests for any repairs, restorations
or improvements to the Real Property from any Person, including without
limitation any Governmental Authority, except such requests of employees as have
been denied in the exercise of prudent business and operational practices. There
are no outstanding contracts made by BJ HLS, HZ HLS or HollySys Subsidiary for
any improvements to the Real Property which have not been fully paid for. No
person, other than BJ HLS, HZ HLS and HollySys Subsidiary, owns any equipment or
other tangible assets or properties situated on the Real Property or necessary
to the operation of the Business, except for leased items disclosed in Schedule
4.9 hereto.
(c) The use and operation of the Real Property is in full compliance
in all material respects with all Laws, covenants, conditions, restrictions,
easements, disposition agreements and similar matters affecting the Real
Property and, effective as of the Closing, BJ HLS, HZ HLS and HollySys
Subsidiary shall have the right under all Laws to continue the use and operation
of the Real Property in the conduct of the Business. Neither BJ HLS, HZ HLS nor
HollySys Subsidiary has received any notice of any violation (or claimed
violation) of or investigation regarding any Laws.
(d) To the best knowledge of BJ HLS, HZ HLS and HollySys Subsidiary,
none of the buildings, structures and other improvements located on the Real
Property, the appurtenances thereto or the equipment therein or the operation or
maintenance thereof violates any restrictive covenant or encroaches on any
property owned by others or any easement, right of way or other encumbrance or
restriction affecting or burdening such Real Property in any manner which would
have a HollySys Material Adverse Effect on the condition (financial or
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otherwise), assets, operations or results of operations of BJ HLS, HZ HLS or
HollySys Subsidiary, nor does any building or structure of any third party
encroach upon the Real Property or any easement or right of way benefiting the
Real Property. To the best knowledge of BJ HLS, HZ HLS and HollySys Subsidiary,
the Real Property and its continued use, occupancy and operation as used,
occupied and operated in the conduct of the Business does not constitute a
nonconforming use under any Law.
(e) Neither BJ HLS, HZ HLS nor HollySys Subsidiary has received
written notice of, or otherwise had knowledge of, any condemnation, fire,
health, safety, building, environmental, hazardous substances, pollution
control, zoning or other land use regulatory proceedings, either instituted or
planned to be instituted, which would have an effect on the ownership, use and
operation of any portion of the Real Property for its intended purpose or the
value of any material portion of the Real Property, nor has BJ HLS, HZ HLS or
HollySys Subsidiary received written notice of any special assessment
proceedings affecting any of the Real Property.
(f) To the best knowledge of BJ HLS, HZ HLS and HollySys Subsidiary,
all water, sewer, gas, electric, telephone and drainage facilities, and all
other utilities required by any applicable law are installed to the property
lines of the Real Property, are connected pursuant to valid permits to municipal
or public utility services or proper drainage facilities to permit full
compliance with the requirement of all Laws. To the best knowledge of BJ HLS, HZ
HLS and HollySys Subsidiary, no fact or condition exists which could result in
the termination or reduction of the current access from the Real Property to
existing roads or to sewer or other utility services presently serving the Real
Property.
(g) All Permits, certificates, easements and rights of way,
including proof of dedication, required from all governmental entities having
jurisdiction over the Real Property for the use and operation of the Real
Property in the conduct of the Business and to ensure vehicular and pedestrian
ingress to and egress from the Real Property have been obtained.
(h) Neither BJ HLS, HZ HLS nor HollySys Subsidiary has received
written notice and has any knowledge of any pending or threatened condemnation
proceeding affecting the Real Property or any part thereof or of any sale or
other disposition of the Real Property or any part thereof in lieu of
condemnation.
(i) No portion of the Real Property has suffered any material damage
by fire or other casualty which has not heretofore been completely repaired and
restored to its original condition.
(j) There are no encroachments or other facts or conditions
affecting the Real Property that would be revealed by an accurate survey thereof
which would, individually or in the aggregate, interfere in any material respect
with the use, occupancy or operation thereof as used, occupied and operated in
the conduct of the Business.
4.16 TAXES, TAX RETURNS AND AUDITS. Except as specifically set forth in
the September Financial Statements or Schedule 4.16, (i) BJ HLS, HZ HLS and
HollySys Subsidiary has filed on a timely basis (taking into account any
extensions received from the relevant taxing authorities) all returns and
reports pertaining to all Taxes that are or were required to be filed by BJ HLS,
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HZ HLS and HollySys Subsidiary with the appropriate taxing authorities in all
jurisdictions in which such returns and reports are or were required to be
filed, and all such returns and reports are true, correct and complete in all
material respects, (ii) all Taxes that are due from or may be asserted against
BJ HLS, HZ HLS and HollySys Subsidiary (including deferred Taxes) in respect of
or attributable to all periods ending on or before the Closing Date have been or
will be fully paid, deposited or adequately provided for on the books and
financial statements of BJ HLS, HZ HLS and HollySys Subsidiary or are being
contested in good faith by appropriate proceedings, (iii) no issues have been
raised (or are currently pending) by any taxing authority in connection with any
of the returns and reports referred to in clause (a) which might be determined
adversely to BJ HLS, HZ HLS or HollySys Subsidiary and which could have a
HollySys Material adverse effect, (iv) Neither BJ HLS, HZ HLS nor HollySys
Subsidiary has given or requested to give waivers or extensions of any statute
of limitations with respect to the payment of Taxes and (e) no tax liens which
have not been satisfied or discharged by payment or concession by the relevant
taxing authority or as to which sufficient reserves have not been established on
the books and financial statements of BJ HLS, HZ HLS and HollySys Subsidiary are
in force as of the date hereof. Schedule 4.16 sets forth all accurate and
complete list of each taxing authority to which BJ HLS, HZ HLS and HollySys
Subsidiary are required or may be required to file notices, returns or payments,
with a brief description of the tax or exemption applicable to BJ HLS, HZ HLS
and HollySys Subsidiary.
4.17 ABSENCE OF CERTAIN CHANGES. Except as set forth on Schedule 4.17 or
agreed by CNCAC in advance and incurred in ordinary business in compliance with
past practice, neither BJ HLS, HZ HLS nor HollySys Subsidiary has, since
September 30, 2005:
(a) issued, delivered or agreed to issue or deliver any stock, bonds
or other corporate securities (whether authorized and unissued or held in the
treasury), or granted or agreed to grant any options (including employee stock
options), warrants or other rights for the issue thereof;
(b) borrowed or agreed to borrow any funds exceeding $1,000,000 (or
other currency equivalent) except current bank borrowings not in excess of the
amount thereof shown on the September Financial Statements;
(c) incurred any obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due exceeding $1,000,000 (or
other currency equivalent), except current liabilities for trade obligations
incurred in the ordinary course of business and consistent with prior practice;
(d) discharged or satisfied any encumbrance exceeding $1,000,000 (or
other currency equivalent) other than those then required to be discharged or
satisfied, or paid any obligation or liability other than current liabilities
shown on the 2005 Financial Statements and liabilities incurred since June 30,
2005 in the ordinary course of business and consistent with prior practice;
(e) sold, transferred, leased to others or otherwise disposed of any
assets exceeding $1,000,000 (or other currency equivalent), except for
inventories sold in the ordinary course of business and assets no longer used or
useful in the conduct of its business, or canceled or compromised any debt or
claim, or waived or released any right of substantial value;
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(f) received any notice of termination of any Contract, Lease or
other agreement, or suffered any damage, destruction or loss exceeding
$1,000,000 (or other currency equivalent) (whether or not covered by insurance)
which, in any case or in the aggregate, has had, or might reasonably be expected
to have, a HollySys Material Adverse Effect;
(g) had any material change in its relations with its employees or
agents, clients or insurance carriers which has had or might reasonably be
expected to have a HollySys Material Adverse Effect;
(h) transferred or granted any rights under, or entered into any
settlement regarding the breach or infringement of, any Intellectual Property or
modified any existing rights with respect thereto;
(i) declared or made, or agreed to declare or make, any payment of
dividends or distributions of any assets of any kind whatsoever to any
shareholder of BJ HLS, HZ HLS or HollySys Subsidiary or any affiliate of any
shareholder of BJ HLS, HZ HLS or HollySys Subsidiary, or purchased or redeemed,
or agreed to purchase or redeem, any of its capital stock, or made or agreed to
make any payment to any shareholder of BJ HLS, HZ HLS or HollySys Subsidiary or
any affiliate of any shareholder of any BJ HLS, HZ HLS or HollySys Subsidiary,
whether on account of debt, management fees or otherwise;
(j) suffered any other material adverse effect in its assets,
liabilities, financial condition, results of operations or business; or
(k) entered into any agreement or made any commitment to take any of
the types of action described in any of the foregoing clauses (other than
clauses (f), (g) or (j)).
4.18 EMPLOYEE PLANS; LABOR MATTERS. The 2005 Financial Statements and
Schedule 4.18 together contain an accurate and complete list and description of
all employee benefits, including without limitation pension, medical insurance,
work related injury insurance, birth and nursery insurance, unemployment
insurance and educational benefits, which BJ HLS, HZ HLS and HollySys Subsidiary
are obligated to pay, including amounts and recipients of such payments. Except
as disclosed in the September Financial Statements or Schedule 4.18, BJ HLS, HZ
HLS and HollySys Subsidiary has complied with all applicable Laws relating to
employment benefits, including, without limitation, pension, medical insurance,
work-related injury insurance, birth and nursery insurance, unemployment
insurance and educational benefits. All contributions or payments required to be
made by BJ HLS, HZ HLS and HollySys Subsidiary with respect to employee benefits
have been made on or before their due dates. Except as disclosed in the 2005
Financial Statements or Schedule 4.18, all such contributions and payments
required to be made by any employees of HollySys Subsidiary with respect to the
employee benefits have been fully deducted and paid to the relevant Governmental
Authorities on or before their due dates, and no such deductions have been
challenged or disallowed by any Governmental Authority or any employee of BJ
HLS, HZ HLS or HollySys Subsidiary.
4.19 COMPLIANCE WITH LAW. The Business has been conducted, and is now
being conducted, by BJ HLS, HZ HLS and HollySys Subsidiary in compliance in all
material respects with all applicable Laws. Neither BJ HLS, HZ HLS nor HollySys
Subsidiary and no officers, directors and employees of BJ HLS, HZ HLS or
HollySys Subsidiary (i) is, and during the past five years was, in violation of,
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or not in compliance with, in any material respect all such applicable Laws with
respect to the conduct of the Business; and (ii) has received any notice from
any Governmental Authority, and to the best of its knowledge, no Action is
threatened which alleges that BJ HLS, HZ HLS or HollySys Subsidiary has
violated, or not complied with, any of the above.
4.20 NO ILLEGAL OR IMPROPER TRANSACTIONS. Neither BJ HLS, HZ HLS nor
HollySys Subsidiary nor any other officer, director, employee, agent or
affiliate of BJ HLS, HZ HLS or HollySys Subsidiary has offered, paid or agreed
to pay to any Person or entity (including any governmental official) or
solicited, received or agreed to receive from any such Person or entity,
directly or indirectly, in any manner which is in violation of any applicable
policy of BJ HLS, HZ HLS or HollySys Subsidiary, ordinance, regulation or law,
any money or anything of value for the purpose or with the intent of (i)
obtaining or maintaining business for BJ HLS, HZ HLS or HollySys Subsidiary,
(ii) facilitating the purchase or sale of any product or service, or (iii)
avoiding the imposition of any fine or penalty.
4.21 RELATED TRANSACTIONS. Except as set forth in the 2005 Financial
Statements or Schedule 4.21, and except for compensation to employees for
services rendered, neither BJ HLS, HZ HLS nor HollySys Subsidiary and no other
current or former director, officer, employee or shareholder or any associate
(as defined in the rules promulgated under the Exchange Act) of BJ HLS, HZ HLS
or HollySys Subsidiary is presently, or during the last three fiscal years has
been, (a) a party to any transaction with any BJ HLS, HZ HLS or HollySys
Subsidiary (including, but not limited to, any Contract providing for the
furnishing of services by, or rental of real or personal property from, or
otherwise requiring payments to, any such director, officer, employee or
shareholder or such associate), or (b) the direct or indirect owner of an
interest in any corporation, firm, association or business organization which is
a present (or potential) competitor, supplier or customer of BJ HLS, HZ HLS or
HollySys Subsidiary nor does any such Person receive income from any source
other than BJ HLS, HZ HLS or HollySys Subsidiary which relates to the business
of, or should properly accrue to, BJ HLS, HZ HLS or HollySys Subsidiary.
4.22 RECORDS. The books of account, minute books, stock certificate books
and stock transfer ledgers of BJ HLS, HZ HLS and HollySys Subsidiary are
complete and correct in all material respects, and there have been no material
transactions involving BJ HLS, HZ HLS or HollySys Subsidiary which are required
to be set forth therein and which have not been so set forth.
4.23 INSURANCE. Schedule 4.23 sets forth a complete list and complete and
accurate description of all insurance policies maintained by BJ HLS, HZ HLS and
HollySys Subsidiary which are in force as of the date hereof and the amounts of
coverage thereunder. During the past three years, neither BJ HLS, HZ HLS nor
HollySys Subsidiary has been refused insurance in connection with the Business,
nor has any claim in excess of $10,000 been made in respect of any such
agreements or policies, except as set forth in Schedule 4.23 hereto. Such
insurance is adequate to protect BJ HLS, HZ HLS and HollySys Subsidiary and its
financial condition against the risks involved in the conduct of the Business.
4.24 LITIGATION. Except as set forth in Schedule 4.24, there are no
Actions by any Governmental Authority or Person by or against BJ HLS, HZ HLS or
HollySys Subsidiary, nor to the best of its knowledge, any threatened Action by
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any Governmental Authority or Person against BJ HLS, HZ HLS or HollySys
Subsidiary. Neither BJ HLS, HZ HLS nor HollySys Subsidiary or any of their
respective property is subject to any Action by a Governmental Authority or
Person which would cause a HollySys Material Adverse Effect.
4.25 SETTLED LITIGATION. Schedule 4.25 sets forth a description of all
threatened, withdrawn, settled or litigated claims against BJ HLS, HZ HLS or
HollySys Subsidiary during the last three years.
4.26 BROKERS. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of HollySys Holdings, BJ HLS, HZ HLS, HollySys Subsidiary or any
HollySys Stockholder.
4.27 AFFILIATES. BJ HLS owns the following interests: (i) 37.5% of New
Huake Electronics Technology Co., Ltd.; (ii) 40% of HollySys Electric Tech. Co.,
Ltd.; (iii) 40% of HollySys information Technology Co., Ltd., (iv) 89.11% of
Beijing HollySys Zhonghao Automation Engineering Technology Co., Ltd.; (v)
16.96% of Beijing HollySys Hengye Science & Technology Co., Ltd.; (vi) 72% of
Shenzhen HollySys Automation Engineering Co., Ltd.; (vii) 5% of Zhongjijing
Investment & Consulting Co., Ltd.; (viii) 20% of HollySys Equipment Technology
Co., Ltd. and (ix) 50% of Beijing Tech-Energy Co. (collectively, the
"Affiliates"). There are no contracts between any Affiliate and either BJ HLS
and HZ HLS that would require disclosure under Section 0 or licenses of
Intellectual Property Rights to an Affiliate by either BJ HLS, HZ HLS or the
HollySys Subsidiary that would require disclosure under Section 0.
4.28 DISCLOSURE. No representation or warranty by BJ HLS, HZ HLS, HollySys
Subsidiary or each HollySys Stockholder contained in this Agreement and no
information contained in any Schedule or other instrument furnished or to be
furnished to CNCAC pursuant to this Agreement or in connection with the
transactions contemplated hereby contains or will contain any untrue statement
of a material fact or omits or will omit to state a material fact necessary in
order to make the statements contained therein not misleading.
4.29 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of BJ HLS, HZ HLS, HollySys Subsidiary and each HollySys Stockholder
set forth in ARTICLE IV of this Agreement shall survive the Closing for a period
of four years, except that the representations and warranties set forth in
Sections 0, 0 and 0 shall survive without limitation as to time and the
representations and warranties set forth in Section 0 shall survive until the
expiration of the statute of limitations with respect to each respective Tax.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF CNCAC
CNCAC represents and warrants to HollySys Holdings, BJ HLS, HZ HLS and
each HollySys Stockholder as follows, and after Chardan Sub has been set up by
CNCAC, the representations and warranties set forth in Section 5.2(c), 5.3, 5.4,
5.6, 5.9, 5.10, 5.11, 5.12, 5.13, 5.14, 5.15, 5.16 apply to Chardan Sub:
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5.1 ORGANIZATION. CNCAC is, and Chardan Sub will be, a corporation duly
organized, validly existing and in good standing under the law of Delaware and
BVI, respectively.
5.2 CAPITALIZATION.
(a) Capitalization.
(i) The authorized capital stock of CNCAC includes 20,000,000
shares of common stock and 1,000,000 shares of preferred stock of which
7,000,000 shares of common stock are issued and outstanding and no shares of
preferred stock are issued and outstanding. There are warrants outstanding to
purchase up to 11,500,000 shares of common stock at a current exercise price of
$5.00 per share (the number and price subject to adjustment), expiring August 2,
2009 and an option to purchase 250,000 units exercisable at $7.50 per unit, with
each unit being comprised of one share of common stock and two warrants, with
each such warrant issuable upon exercise of a unit being exercisable for one
share at $6.65. Except as set forth in this Section 5.2, there are no other
options, warrants or rights (other than as contemplated by this Agreement) to
acquire any capital stock of CNCAC.
(ii) As of the Closing, the authorized capital stock of
Chardan Sub will include 50,000,000 shares of common stock and 1,000,000 shares
of preferred stock, of which 100 shares of common stock will be issued and
outstanding held by CNCAC and no shares of preferred stock will be issued and
outstanding. As of the Closing, there will be no options, warrants or rights
(other than as contemplated by this Agreement) to acquire any capital stock of
Chardan Sub.
(iii) Upon the merger of CNCAC with and into Chardan Sub, for
the purpose of re-domestication into the BVI, (i) each outstanding share of
CNCAC will be converted into one share of Chardan Sub, and the existing 100
shares of Chardan Sub Stock issued and outstanding will be extinguished as a
contribution to capital, and (ii) there will be assumed the obligation to issue
shares of common stock upon exercise of the currently outstanding CNCAC warrants
and options.
(iv) Upon the acquisition of HollySys Holdings as contemplated
by this Agreement, there will be issued the shares of CNCAC as set forth
elsewhere in this Agreement.
(b) Ownership. CNCAC will be the registered and sole beneficial
owner of all the currently issued and outstanding shares of Chardan Sub Stock,
aggregating 100 shares.
(c) Disputes. There are no disputes, arbitrations or litigation
proceedings involving CNCAC with respect to the common stock and outstanding
warrants, options and other rights relating to the capital stock of CNCAC.
(d) Issuances. Except for the issuance of common stock, warrants and
options as set forth in the SEC Reports of Chardan and the Registration
Statement on Form S-1, SEC Registration Statement No. 333-125016, there have not
been any issuances of capital securities or options, warrants or rights to
acquire the capital securities of CNCAC.
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5.3 AUTHORITY AND CORPORATE ACTION; NO CONFLICT.
(a) CNCAC has all necessary corporate power and authority to enter
this Agreement and, subject to the requirement to obtain stockholder approval,
to consummate the transactions contemplated hereby. Except for the actions
required to redomesticate CNCAC in the British Virgin Islands, all board of
directors action necessary to be taken by CNCAC to authorize the execution,
delivery and performance of this Agreement, the Transaction Documents and all
other agreements delivered in connection with this transaction has been duly and
validly taken. This Agreement has been duly executed and delivered by CNCAC and
constitutes the valid, binding, and enforceable obligation of CNCAC, enforceable
in accordance with its terms, except (i) as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or similar laws of general application now or hereafter in effect
affecting the rights and remedies of creditors and by general principles of
equity (regardless of whether enforcement is sought in a proceeding at law or in
equity), (ii) as enforceability of any indemnification provision may be limited
by federal and state securities laws and public policy and (iii) as
enforceability may be limited by the absence of stockholder approval.
(b) Neither the execution and delivery of this Agreement or any of
the other documents contemplated hereby by CNCAC nor (assuming receipt of
stockholder approval) the consummation of the transactions contemplated hereby
or thereby will (i) conflict with, result in a breach or violation of or
constitute (or with notice of lapse of time or both constitute) a default under,
(A) the Certificate of Incorporation or By-Laws of CNCAC or (B) any law,
statute, regulation, order, judgment or decree or any instrument contract or
other agreement to which CNCAC is a party or by which CNCAC (or any of the
properties or assets of CNCAC) is subject or bound; (ii) result in the creation
of, or give any party the right to create, any lien, charge, option, security
interest or other encumbrance upon the assets of CNCAC; (iii) terminate or
modify, or give any third party the right to terminate or modify, the provisions
or terms of any contract to which CNCAC is a party; or (iv) result in any
suspension, revocation, impairment, forfeiture or nonrenewal of any permit,
license, qualification, authorization or approval applicable to CNCAC.
5.4 CONSENTS AND APPROVALS. Other than the requirement to obtain
stockholder approval and satisfy the redomestication and merger requirements of
Delaware and the British Virgin Islands, the execution and delivery of this
Agreement and the Transaction Documents by CNCAC does not, and the performance
of this Agreement and the Transaction Documents by each will not, require any
consent, approval, authorization or other action by, or filing with or
notification to, any Governmental Authority, except where failure to obtain such
consents, approvals, authorizations or actions, or to make such filings or
notifications, would not prevent it from performing any of its material
obligations under this Agreement and the Transaction Documents.
5.5 VALID ISSUANCE OF CHARDAN SUB STOCK. The shares of Chardan Sub Stock
to be issued to the HollySys Stockholders will be duly and validly authorized
and, when issued and delivered in accordance with the terms hereof for the
consideration provided for herein, will be validly issued and will constitute
legally binding obligations of Chardan Sub in accordance with their terms and
will have been issued in compliance with all applicable federal and state
securities laws.
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5.6 FINANCIAL STATEMENTS.
(a) The audited consolidated financial statements and the unaudited
consolidated financial statements of CNCAC included in CNCAC's Quarterly Report
on Form 10-QSB for the quarter ended September 30, 2005 fairly present in
conformity with GAAP applied on a consistent basis the financial position and
assets and liabilities of CNCAC as of the dates thereof and CNCAC's results of
operations and cash flows for the periods then ended (subject, in the case of
any unaudited interim financial statement, to normal, recurring year-end
adjustments which were not or are not expected to be material in amount). The
balance sheet of CNCAC as of September 30, 2005 that is included in such
financial statements is referred to herein as "CNCAC's Balance Sheet."
(b) Attached hereto as Schedule 5.6(b) is an unaudited, unreviewed
balance sheet of CNCAC prepared by management of CNCAC as of a date within seven
days prior to the date of this Agreement, prepared in accordance with GAAP,
applied on a consistent basis with prior practice of CNCAC.
5.7 SEC REPORTS.
(a) CNCAC has delivered to HollySys or has made available by
publicly available filing, (i) CNCAC's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 2005 (ii) CNCAC's prospectus, dated August 2, 2005,
relating to its initial public offering of securities, and (iii) all other
reports filed by CNCAC under the Exchange Act (all of such materials, together
with any amendments thereto and documents incorporated by reference therein, are
referred to herein as the "SEC Reports").
(b) As of its filing date or, if applicable, its effective date,
each SEC Report complied in all material respects with the requirements of the
Laws applicable to CNCAC for such SEC Report, including the Securities Act and
the Exchange Act.
(c) Each SEC Report as of its filing date and the prospectus
referred to in clause (iii) of Section 00, as of its effective date, did not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. CNCAC has filed all
reports under the Exchange Act that were required to be filed as of the date
hereof and will have filed all such reports required to have been filed through
the Closing Date and has otherwise materially complied with all requirements of
the Securities Act and the Exchange Act.
5.8 TRUST FUND. As of the date hereof and at the Closing Date, CNCAC has
and will have no less than $30,000,000 invested in Government Securities in a
trust account with Lehman Brothers, administered by Continental Stock Transfer
Trust Company, less such amounts, if any, as CNCAC is required to pay to
stockholders who elect to have their shares redeemed in accordance with the
provisions of CNCAC's Certificate of Incorporation.
5.9 NO UNDISCLOSED LIABILITIES. CNCAC does not have any liabilities, debts
or cash contingencies, pledges in any form, obligations, undertakings or
arrangements, whether known or unknown, absolute, accrued, contingent or
otherwise, except (a) as and to the extent reflected or reserved against on
CNCAC's Balance Sheet; and (b) those incurred since September 30, 2005 in the
ordinary course of business and consistent with prior practice.
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5.10 ABSENCE OF CERTAIN CHANGES. Except as contemplated by this Agreement
and those incurred in ordinary business consistent with past practice, CNCAC has
not, since September 30, 2005:
(a) issued, delivered or agreed to issue or deliver any stock, bonds
or other corporate securities (whether authorized and unissued or held in the
treasury), or granted or agreed to grant any options (including employee stock
options), warrants or other rights for the issue thereof;
(b) been removed from trading on the OTC-BB because of a breach or
violation of any applicable laws, or received notice by any security supervisory
agencies warning or punishing CNCAC due to a violation of exchange market rules
or receive notice of termination or suspension in trading on the OTC-BB, except
for suspensions for trading in normal situations;
(c) borrowed or agreed to borrow any funds exceeding $200,000,
except current bank borrowings not in excess of the amount thereof shown on the
Balance Sheet;
(d) incurred any obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due exceeding $200,000, except
current liabilities for trade obligations incurred in the ordinary course of
business and consistent with prior practice;
(e) discharged or satisfied any encumbrance exceeding $200,000 other
than those then required to be discharged or satisfied, or paid any obligation
or liability other than current liabilities shown on the Balance Sheet and
liabilities incurred since September 30, 2005 in the ordinary course of business
and consistent with prior practice;
(f) sold, transferred, leased to others or otherwise disposed of any
assets exceeding $100,000, except for inventories sold in the ordinary course of
business and assets no longer used or useful in the conduct of its business, or
canceled or compromised any debt or claim, or waived or released any right of
substantial value;
(g) received any notice of termination of any Contract, Lease or
other agreement, or suffered any damage, destruction or loss exceeding $100,000
(whether or not covered by insurance) which, in any case or in the aggregate,
has had, or might reasonably be expected to have, a material adverse effect on
the business or financial condition of CNCAC ("CNCAC Material Adverse Effect");
(h) had any material change in its relations with its employees or
agents, clients or insurance carriers which has had or might reasonably be
expected to have a CNCAC Material Adverse Effect;
(i) suffered any other serious material adverse effect in its
assets, liabilities, financial condition, results of operations or business; or
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(j) entered into any agreement or made any commitment to take any of
the types of action described in any of the foregoing clauses (other than
clauses (f), (g) or (i)).
5.11 COMPLIANCE WITH LAW. The business of CNCAC has been conducted, and is
now being conducted, in compliance in all material respects with all applicable
Laws. CNCAC and its officers, directors and employees (i) are not, and during
the periods of CNCAC's existence were not, in violation of, or not in compliance
with, in any material respect all such applicable Laws with respect to the
conduct of the businesses of CNCAC; and (ii) have not received any notice from
any Governmental Authority, and to the best of the knowledge of CNCAC none is
threatened, alleging that CNCAC has violated, or not complied with, any of the
above.
5.12 LITIGATION. There are no actions, suits, arbitrations or other
proceedings pending or, to the best of the knowledge of CNCAC, threatened
against CNCAC at law or in equity before any Governmental Authority. Neither
CNCAC nor any of their property is subject to any order, judgment, injunction or
decree that would have a material adverse effect on the business or financial
condition of CNCAC.
5.13 BROKERS. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the
transaction contemplated by this Agreement based upon arrangements made by or on
behalf of CNCAC.
5.14 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of CNCAC set forth in this Agreement shall survive the Closing for a
period of four years, except that the representations in Section 0 shall survive
without limitation as to time.
5.15 RECORDS. The books of account, minute books, stock certificate books
and stock transfer ledgers of CNCAC are complete and correct in all material
respects, and there have been no material transactions involving CNCAC which are
required to be set forth therein and which have not been so set forth.
5.16 DISCLOSURE. No representation or warranty by CNCAC contained in this
Agreement and no information contained in any Schedule or other instrument
furnished or to be furnished to BJ HLS, HZ HLS or the HollySys Stockholders
pursuant to this Agreement or in connection with the transactions contemplated
hereby contains or will contain any untrue statement of a material fact or omits
or will omit to state a material fact necessary in order to make the statements
contained therein not misleading.
ARTICLE VI
COVENANTS REGARDING HOLLYSYS, HOLLYSYS SUBSIDIARY
AND THE HOLLYSYS STOCKHOLDERS
6.1 CONDUCT OF THE BUSINESS. Each HollySys Stockholder covenants and
agrees that, from the date hereof through the Closing Date, except as otherwise
set forth in this Agreement or with the prior written consent of CNCAC, they
shall, and shall use their best efforts to cause HollySys Holdings, BJ HLS, HZ
HLS and HollySys Subsidiary to:
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(a) conduct the Business only in the ordinary course and in a manner
consistent with the current practice of the Business, except as required to
reorganize for the purpose of satisfying Section 6.14 hereof, to preserve
substantially intact the business organization of BJ HLS, HZ HLS and HollySys
Subsidiary, to keep available the services of the current employees of BJ HLS,
HZ HLS and HollySys Subsidiary, to preserve the current relationships of BJ HLS,
HZ HLS and HollySys Subsidiary with customers and other persons with which BJ
HLS, HZ HLS and HollySys Subsidiary has significant business relations and to
comply with all Laws;
(b) except as required to reorganize for the purpose of satisfying
Section 6.14 hereof, not pledge, sell, transfer, dispose or otherwise encumber
or grant any rights or interests to others of any kind with respect to all or
any part of the stock of HollySys Holdings, BJ HLS, HZ HLS, or HollySys
Subsidiary, or enter into any discussions or negotiations with any other party
to do so;
(c) not pledge, sell, lease, transfer, dispose of or otherwise
encumber any property or assets of BJ HLS, HZ HLS or HollySys Subsidiary, other
than consistent with past practices and in the ordinary course of business of BJ
HLS, HZ HLS and HollySys Subsidiary or enter into any discussions or
negotiations with any other party to do so;
(d) except as required to reorganize for the purpose of satisfying
Section 6.14 hereof, not issue any shares of capital stock of HollySys Holdings,
BJ HLS, HZ HLS or HollySys Subsidiary or any other class of securities, whether
debt (other than debt incurred in the ordinary course of business and consistent
with past practice) or equity, of HollySys Holdings, BJ HLS, HZ HLS or HollySys
Subsidiary or any options therefor or any securities convertible into or
exchangeable for capital stock of HollySys Holdings, BJ HLS, HZ HLS or HollySys
Subsidiary or enter into any agreements in respect of the ownership or control
of such capital stock;
(e) not declare any dividend or make any distribution in cash,
securities or otherwise on the outstanding shares of capital stock of HollySys
Holdings, BJ HLS, HZ HLS or HollySys Subsidiary or directly or indirectly
redeem, purchase or in any other manner whatsoever advance, transfer (other than
in payment for goods received or services rendered in the ordinary course of
business), or distribute to any of their affiliates or otherwise withdraw cash
or cash equivalents in any manner inconsistent with established cash management
practices, except to pay existing indebtedness of BJ HLS, HZ HLS or HollySys
Subsidiary;
(f) not make, agree to make or announce any general wage or salary
increase or enter into any employment contract or, unless provided for on or
before the date of this Agreement, increase the compensation payable or to
become payable to any officer or employee of BJ HLS, HZ HLS or HollySys
Subsidiary or adopt or increase the benefits of any bonus, insurance, pension or
other employee benefit plan, payment or arrangement, except for those increases,
consistent with past practices, normally occurring as the result of regularly
scheduled salary reviews and increases, and except for increases directly or
indirectly required as a result of changes in applicable law or regulations;
(g) not to amend the Memorandum and Articles of Association (or
other organizational documents) of HollySys Holdings, BJ HLS, HZ HLS or HollySys
Subsidiary;
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(h) except as required to reorganize for the purpose of satisfying
Section 6.14, not to merge or consolidate with, or acquire all or substantially
all the assets of, or otherwise acquire any business operations of, any Person;
(i) not to make any payments outside the ordinary course of
business; and
(j) not make any capital expenditures, except in accordance with
prudent business and operational practices consistent with prior practice.
6.2 ACCESS TO INFORMATION. Between the date of this Agreement and the
Closing Date, the HollySys Stockholders will, and will use their best efforts to
cause BJ HLS, HZ HLS and HollySys Subsidiary to, (i) permit CNCAC and its
Representatives reasonable access to all of the books, records, reports and
other related materials, offices and other facilities and properties of BJ HLS,
HZ HLS, HollySys Subsidiary and the Business; (ii) permit CNCAC and its
Representatives to make such inspections thereof as CNCAC may reasonably
request; and (iii) furnish CNCAC and its Representatives with such financial and
operating data (including without limitation the work papers of HollySys's
Accountants) and other information with respect to HollySys Holdings, BJ HLS, HZ
HLS and HollySys Subsidiary and the Business as CNCAC may from time to time
reasonably request.
6.3 INSURANCE. Through the Closing Date, the HollySys Stockholders shall
use their best efforts to cause BJ HLS, HZ HLS and HollySys Subsidiary to
maintain insurance policies providing insurance coverage for the Business and
the assets of BJ HLS, HZ HLS and HollySys Subsidiary of the kinds, in the
amounts and against the risks as are commercially reasonable for the businesses
and risks covered.
6.4 PROTECTION OF CONFIDENTIAL INFORMATION; NON-COMPETITION.
(a) Confidential Information. Each HollySys Stockholder acknowledges
that:
(i) As a result of their stock ownership of and employment by
BJ HLS, HZ HLS HollySys Subsidiary, they have obtained secret and confidential
information concerning the Business including, without limitation, financial
information, trade secrets and "know-how," customers, and certain methodologies
("Confidential Information").
(ii) BJ HLS, HZ HLS and HollySys Subsidiary will suffer
substantial damage which will be difficult to compute if they should divulge
Confidential Information or enter a business competitive with that of BJ HLS, HZ
HLS or HollySys Subsidiary.
(iii) The provisions of this Section are reasonable and
necessary for the protection of the Business.
(b) Maintain Confidentiality. Each HollySys Stockholder agrees to
not at any time after the date hereof divulge to any person or entity any
Confidential Information obtained or learned as a result of stock ownership of
BJ HLS, HZ HLS or HollySys Subsidiary and employment by BJ HLS, HZ HLS or
HollySys Subsidiary except (i) with the express written consent of CNCAC on or
before the Closing Date and of Chardan Sub's Board of Directors thereafter; (ii)
to the extent that any such information is in the public domain other than as a
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result of a breach of any obligations hereunder; or (iii) where required to be
disclosed by court order, subpoena or other government process. If any HollySys
Stockholder shall be required to make disclosure pursuant to the provisions of
clause (iii) of the preceding sentence, it will promptly, but in no event more
than 72 hours after learning of such subpoena, court order, or other government
process, notify, by personal delivery or by electronic means, confirmed by mail,
BJ HLS, HZ HLS or HollySys Subsidiary and, at the expense of BJ HLS, HZ HLS or
HollySys Subsidiary, shall: (i) take all reasonably necessary steps required by
BJ HLS, HZ HLS or HollySys Subsidiary to defend against the enforcement of such
subpoena, court order or other government process, and (ii) permit BJ HLS, HZ
HLS or HollySys Subsidiary to intervene and participate with counsel of its
choice in any proceeding relating to the enforcement thereof.
(c) Records. At the Closing, each HollySys Stockholder will promptly
deliver to BJ HLS, HZ HLS and HollySys Subsidiary all original memoranda, notes,
records, reports, manuals, formula and other documents relating to the Business
and all property associated therewith, which they then possess or have under
their control; provided, however, that they shall be entitled to retain copies
of such documents reasonably necessary to document their financial relationship
with BJ HLS, HZ HLS and HollySys Subsidiary.
(d) Non-Compete. During the Non-Competition Period, no HollySys
Stockholder, without the prior written permission of HollySys Holdings, shall,
anywhere in the PRC, Hong Kong and Taiwan, directly or indirectly, (i) enter
into the employ of or render any services to any person, firm or corporation
engaged in any business which is a "Competitive Business" (as defined below);
(ii) engage in any Competitive Business for his own account; (iii) become
associated with or interested in any Competitive Business as an individual,
partner, shareholder, creditor, director, officer, principal, agent, employee,
trustee, consultant, advisor or in any other relationship or capacity; (iv)
employ or retain, or have or cause any other person or entity to employ or
retain, any person who was employed or retained by BJ HLS, HZ HLS, HollySys
Subsidiary or any other HollySys Stockholder in the six-month period prior to
the date that all relationships of such person terminates with BJ HLS, HZ HLS,
HollySys Subsidiary or other HollySys Stockholder; or (v) solicit, interfere
with, or endeavor to entice away from BJ HLS, HZ HLS, HollySys Subsidiary or any
HollySys Stockholder, for the benefit of a Competitive Business, any of its
customers or other persons with whom BJ HLS, HZ HLS, HollySys Subsidiary or any
HollySys Stockholder has a business relationship. However, nothing in this
Agreement shall preclude them from investing their personal assets in the
securities of any corporation or other business entity which is engaged in a
Competitive Business if such securities are traded on a national stock exchange
or in the over-the-counter market and if such investment does not result in
their beneficially owning, at any time, more than 1% of the publicly-traded
equity securities of such Competitive Business.
(e) Injunctive Relief. If any HollySys Stockholder breaches, or
threatens to breach, any of the provisions of Sections 00, 0 or 0, BJ HLS, HZ
HLS and HollySys Subsidiary shall have the right and remedy to have the
provisions of this Section 0 specifically enforced by any Governmental
Authority, it being acknowledged and agreed by each HollySys Stockholder that
any such breach or threatened breach will cause irreparable injury to BJ HLS, HZ
HLS and HollySys Subsidiary and that money damages will not provide an adequate
remedy.
(f) Modification of Scope. If any provision of Sections 00, 0 or 0
is held to be unenforceable because of the scope, duration or area of its
applicability, the Governmental Authority making such determination shall have
the power to modify such scope, duration, or area, or all of them, and such
provision or provisions shall then be applicable in such modified form.
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(g) Competitive Business. As used in this Agreement,
(i) "Competitive Business" means any business which operates
in any aspect of the Business; and
(ii) "Non-Competition Period" means the period beginning on
the Closing Date and ending on the later of five years from the Closing Date or
two years after the date all relationships between the HollySys Stockholder and
BJ HLS, HZ HLS or HollySys Subsidiary have been terminated, including
relationships as a consultant or employee.
6.5 POST-CLOSING ASSURANCES. From time to time after the Closing, at
CNCAC's request, the HollySys Stockholders will, and will use their best efforts
to cause BJ HLS, HZ HLS and HollySys Subsidiary to, take such other actions and
execute and deliver such other documents, certifications and further assurances
as CNCAC may reasonably require in order to manage and operate BJ HLS, HZ HLS
and HollySys Subsidiary and the Business, including but not limited to executing
such certificates as may be reasonably requested by CNCAC's Accountants in
connection with any audit of the financial statements of BJ HLS, HZ HLS and
HollySys Subsidiary for any period through the Closing Date.
6.6 NO OTHER NEGOTIATIONS. Until the earlier of the Closing or the
termination of this Agreement, the HollySys Stockholders agree that they will
not, and will use their best efforts to cause HollySys Holdings, BJ HLS, HZ HLS
and HollySys Subsidiary not to, (a) solicit, encourage, directly or indirectly,
any inquiries, discussions or proposals for, (b) continue, propose or enter into
any negotiations or discussions looking toward, or (c) enter into any agreement
or understanding providing for any acquisition of any capital stock of HollySys
Holdings, BJ HLS, HZ HLS, HollySys Subsidiary or of any part of their respective
assets or the Business (in whole or in part), nor shall any HollySys
Stockholder, HollySys Holdings, BJ HLS, HZ HLS or HollySys Subsidiary provide
any information to any Person for the purpose of evaluating or determining
whether to make or pursue any such inquiries or proposals with respect to any
such acquisition. Each HollySys Stockholder shall immediately notify CNCAC of
any such inquiries or proposals or requests for information for such purpose.
6.7 NO SECURITIES TRANSACTIONS. No HollySys Stockholder nor any of their
affiliates, directly or indirectly, shall engage in any transactions involving
the securities of CNCAC prior to the time of the making of a public announcement
of the transactions contemplated by this Agreement. The HollySys Stockholders
shall use their best efforts to require each of the officers, directors,
employees, agents and Representatives of HollySys Holdings, BJ HLS, HZ HLS and
HollySys Subsidiary to comply with the foregoing requirement.
6.8 FULFILLMENT OF CONDITIONS. The HollySys Stockholders shall use their
best efforts to fulfill, and to cause HollySys Holdings, BJ HLS, HZ HLS and
HollySys Subsidiary to fulfill, the conditions specified in Article IX to the
extent that the fulfillment of such conditions is within their control. The
foregoing obligation includes (a) the execution and delivery of documents
necessary or desirable to consummate the transactions contemplated hereby and
(b) taking or refraining from such actions as may be necessary to fulfill such
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conditions (including using their best efforts to conduct the Business in such
manner that on the Closing Date the representations and warranties of each
HollySys Stockholder contained herein shall be accurate as though then made,
except as contemplated by the terms hereof).
6.9 DISCLOSURE OF CERTAIN MATTERS. From the date hereof through the
Closing Date, each HollySys Stockholder shall give CNCAC prompt written notice
of any event or development that occurs that (a) had it existed or been known on
the date hereof would have been required to be disclosed under this Agreement,
(b) would cause any of the representations and warranties of each HollySys
Stockholder contained herein to be inaccurate or otherwise misleading, (c) gives
the HollySys Stockholder any reason to believe that any of the conditions set
forth in Article IX will not be satisfied, (d) is of a nature that is or may be
materially adverse to the operations, prospects or condition (financial or
otherwise) of BJ HLS, HZ HLS or HollySys Subsidiary or (e) would require any
amendment or supplement to the Proxy Statement.
6.10 REGULATORY AND OTHER AUTHORIZATIONS; NOTICES AND CONSENTS.
(a) The HollySys Stockholders shall use, and shall use their best
efforts to cause HollySys Holdings, BJ HLS, HZ HLS and HollySys Subsidiary to
use, their commercially reasonable efforts to obtain all authorizations,
consents, orders and approvals of all Governmental Authorities and officials
that may be or become necessary for their execution and delivery of, and the
performance of their obligations pursuant to, this Agreement and the Transaction
Documents and will cooperate fully with CNCAC in promptly seeking to obtain all
such authorizations, consents, orders and approvals.
(b) The HollySys Stockholders shall give, and shall use their best
efforts to cause HollySys Holdings, BJ HLS, HZ HLS and HollySys Subsidiary to
give, promptly such notices to third parties and use its or their best efforts
to obtain such third party consents and estoppel certificates as CNCAC may in
its reasonable discretion deem necessary or desirable in connection with the
transactions contemplated by this Agreement.
(c) CNCAC shall cooperate and use all reasonable efforts to assist
HollySys Holdings, BJ HLS, HZ HLS, HollySys Subsidiary and each HollySys
Stockholder in giving such notices and obtaining such consents and estoppel
certificates; provided, however, that CNCAC shall have no obligation to give any
guarantee or other consideration of any nature in connection with any such
notice, consent or estoppel certificate or to consent to any change in the terms
of any agreement or arrangement which CNCAC in its sole discretion may deem
adverse to the interests of CNCAC, HollySys Holdings, BJ HLS, HZ HLS, HollySys
Subsidiary or the Business.
6.11 USE OF INTELLECTUAL PROPERTY. Each HollySys Stockholder acknowledges
that from and after the Closing, all the Intellectual Property of any kind
related to or used in connection with the Business shall be owned by BJ HLS, HZ
HLS or HollySys Subsidiary, that no HollySys Stockholder nor any of their
affiliates shall have any rights in the Intellectual Property and that no
HollySys Stockholder nor any of their affiliates will contest the ownership or
validity of any rights of Chardan Sub, HollySys Holdings, BJ HLS, HZ HLS or
HollySys Subsidiary in or to the Intellectual Property.
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6.12 RELATED TAX. Each HollySys Stockholder covenants and agrees to pay
any tax and duties assessed on the part of such HollySys Stockholder in
connection with, or as a result of the issuance of the Chardan Sub Stock and
other consideration received pursuant to this Agreement required by any
Governmental Authority.
6.13 HOLLYSYS ACQUISITION. The HollySys Stockholders shall do, and shall
use their best efforts to cause HollySys Holdings, BJ HLS, HZ HLS and HollySys
Subsidiary to do, all things necessary in order to effectuate and consummate the
HollySys Holdings Stock Purchase.
6.14 HOLLYSYS HOLDINGS. The HollySys Stockholders shall use their best
efforts to complete the restructuring related to the formation and ownership of
HollySys Holdings. The HollySys Stockholders shall use their best efforts to
have HollySys Holdings obtain any required approval from its stockholders for
the HollySys Holdings Stock Purchase.
6.15 HOLLYSYS PROXY INFORMATION. As a condition to CNCAC calling and
holding the Stockholder Meeting (as hereinafter defined), the HollySys
Stockholders will furnish, and shall use their best efforts to cause HollySys
Holdings, BJ HLS, HZ HLS and HollySys Subsidiary to furnish, to CNCAC such
information as is reasonably required by CNCAC for the preparation of the Proxy
Statement (as hereinafter defined) in accordance with the requirements of the
Commission (as hereinafter defined), including full and accurate descriptions of
the Business, material agreements affecting the Business, BJ HLS, HZ HLS and
HollySys Subsidiary and the reorganization of BJ HLS, HZ HLS and HollySys
Subsidiary, the HollySys Stockholders and the audited consolidated financial
statements of HollySys and HollySys Subsidiary for each of the three years ended
June 30, 2005, which financial statements will include a balance sheet,
statement of operations and statement of cash flows, prepared in accordance with
either PRC GAAP reconciled to US GAAP or entirely in US GAAP, together with
footnotes and interim consolidated quarterly financial statements for the
quarter ended September 30, 2005, as required by the rules and regulations of
the Commission for combination proxy statement disclosure (collectively,
"HollySys Proxy Information"). The HollySys Proxy Information will not contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements in the HollySys Proxy Information not
misleading.
6.16 INTERIM FINANCIAL INFORMATION. From the date of this Agreement until
the Closing, the HollySys Stockholders shall use their best efforts to cause BJ
HLS and HZ HLS to provide to CNCAC a copy of (i) the monthly internal management
report of financial information concerning BJ HLS, HZ HLS and HollySys
Subsidiary on an individual and consolidated basis, and (ii) a monthly pro forma
balance sheet and income statement on an individual and consolidated basis for
BJ HLS, HZ HLS and HollySys Subsidiary. The above interim financial information
shall be delivered to CNCAC within twenty-five (25) days after each monthly
anniversary of the date of this Agreement. BJ HLS, HZ HLS and HollySys
Subsidiary will prepare the above financial information in good faith in
accordance with PRC GAAP.
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ARTICLE VII
COVENANTS OF CNCAC
7.1 CONDUCT OF THE BUSINESS. CNCAC covenants and agrees that, from the
date hereof through the Closing Date, except (i) in the context of an
unsolicited, bona fide written proposal for a superior transaction or
consummation of a superior transaction, (ii) as otherwise set forth in this
Agreement or (iii) with the prior written consent of the HollySys Stockholders,
it shall:
(a) conduct its business only in the ordinary course and in a manner
consistent with the current practice of their business, except as required to
reorganize for the purpose of redomestication, to preserve substantially intact
the business organization of each CNCAC and Chardan Sub (when established), to
preserve the current relationships of CNCAC and Chardan Sub with customers and
other persons with which they have has significant business relations and to
comply with all Laws;
(b) except as required to reorganize for the purpose of
redomestication, not pledge, sell, transfer, dispose or otherwise encumber or
grant any rights or interests to others of any kind with respect to all or any
part of the capital securities of CNCAC or Chardan Sub (when established);
(c) except as required to reorganize for the purpose of
redomestication, not pledge, sell, lease, transfer, dispose of or otherwise
encumber any property or assets of CNCAC and Chardan Sub (when established),
other than consistent with past practices and in the ordinary course of business
of CNCAC and Chardan Sub (when established);
(d) except as required to reorganize for the purpose of
redomestication, not issue any shares of capital stock of CNCAC and Chardan Sub
(when established) or any other class of securities, whether debt (other than
debt incurred in the ordinary course of business and consistent with past
practice) or equity, of CNCAC and Chardan Sub (when established) or any options
therefor or any securities convertible into or exchangeable for capital stock of
CNCAC and Chardan Sub (when established) or enter into any agreements in respect
of the ownership or control of such capital stock;
(e) not declare any dividend or make any distribution in cash,
securities or otherwise on the outstanding shares of capital stock of CNCAC and
Chardan Sub (when established) or directly or indirectly redeem, purchase or in
any other manner whatsoever advance, transfer (other than in payment for goods
received or services rendered in the ordinary course of business), or distribute
to any of their affiliates or otherwise withdraw cash or cash equivalents in any
manner inconsistent with established cash management practices, except to pay
existing indebtedness of CNCAC and Chardan Sub (when established);
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(f) not make, agree to make or announce any general wage or salary
increase or enter into any employment contract or, unless provided for on or
before the date of this Agreement, increase the compensation payable or to
become payable to any officer or employee of CNCAC and Chardan Sub (when
established) or adopt or increase the benefits of any bonus, insurance, pension
or other employee benefit plan, payment or arrangement, except for those
increases, consistent with past practices, normally occurring as the result of
regularly scheduled salary reviews and increases, and except for increases
directly or indirectly required as a result of changes in applicable law or
regulations;
(g) except as required to reorganize for the purpose of
redomestication, not to amend the Certificate of Incorporation or By-laws or
Memorandum and Articles of Association (or other organizational documents) of
CNCAC and Chardan Sub (when established);
(h) except as required to reorganize for the purpose of
redomestication, not to merge or consolidate with, or acquire all or
substantially all the assets of, or otherwise acquire any business operations
of, any Person;
(i) not to make any payments outside the ordinary course of
business; and
(j) not make any capital expenditures, except in accordance with
prudent business and operational practices consistent with prior practice.
7.2 STOCKHOLDER MEETING. CNCAC shall cause a meeting of its stockholders
(the "Stockholder Meeting") to be duly called and held as soon as reasonably
practicable for the purpose of voting on the adoption of this Agreement as
required by CNCAC's Certificate of Incorporation. The directors of CNCAC shall
recommend to its stockholders that they vote in favor of the adoption of such
matter. In connection with such meeting, CNCAC (a) will file with the Securities
and Exchange Commission ("Commission") as promptly as practicable a proxy
statement/prospectus meeting the requirements of the Exchange Act ("Proxy
Statement") and all other proxy materials for such meeting, (b) upon receipt of
approval from the Commission, will mail to its stockholders the Proxy Statement
and other proxy materials, (c) will use its best efforts to obtain the necessary
approvals by its stockholders of this Agreement and the transactions
contemplated hereby, and (d) will otherwise comply with all legal requirements
applicable to such meeting. As a condition to the filing and distribution to the
CNCAC stockholders of the Proxy Statement, CNCAC will have received the HollySys
Proxy Information. The Proxy Statement will also seek stockholder approval for
adoption of the option plan contemplated by Section 8.9.
7.3 FULFILLMENT OF CONDITIONS. From the date hereof to the Closing Date,
CNCAC shall use its best efforts to fulfill the conditions specified in Article
IX to the extent that the fulfillment of such conditions is within its control.
The foregoing obligation includes (a) the execution and delivery of documents
necessary or desirable to consummate the transactions contemplated hereby, and
(b) taking or refraining from such actions as may be necessary to fulfill such
conditions (including conducting the business of CNCAC in such manner that on
the Closing Date the representations and warranties of CNCAC contained herein
shall be accurate as though then made).
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7.4 DISCLOSURE OF CERTAIN MATTERS. From the date hereof through the
Closing Date, CNCAC shall give the HollySys Stockholders prompt written notice
of any event or development that occurs that (a) had it existed or been known on
the date hereof would have been required to be disclosed under this Agreement,
(b) would cause any of the representations and warranties of CNCAC contained
herein to be inaccurate or otherwise misleading, (c) gives CNCAC any reason to
believe that any of the conditions set forth in Article IX will not be
satisfied, (d) is of a nature that is or may be materially adverse to the
operations, prospects or condition (financial or otherwise) of CNCAC, or (e)
would require any amendment or supplement to the Proxy Statement.
7.5 CHARDAN SUB INCORPORATION. CNCAC will cause Chardan Sub to be
incorporated and duly organized, to adopt the Plan of Merger, to effectuate the
Chardan Merger, to issue the Chardan Sub Stock and to do all other things as are
necessary for it to do as a constituent corporation to the Chardan Merger. The
covenants as set forth in Section 7.3, 7.4 shall apply to Chardan Sub after it
has been formed.
7.6 POST-CLOSING ASSURANCES. CNCAC and Chardan Sub from time to time after
the Closing, at the request of HollySys Holdings or the HollySys Stockholders
will take such other actions and execute and deliver such other documents,
certifications and further assurances as HollySys Holdings or HollySys
Stockholders may reasonably require in order to manage and operate CNCAC and
Chardan Sub and the Business, including but not limited to executing such
certificates as may be reasonably requested by HollySys Holdings or HollySys
Stockholders' Accountants in connection with any audit of the financial
statements of CNCAC and Chardan Sub for any period through the Closing Date.
7.7 REGULATORY AND OTHER AUTHORIZATIONS; NOTICES AND CONSENTS.
(a) CNCAC and Chardan Sub (when established) shall use their
commercially reasonable efforts to obtain all authorizations, consents, orders
and approvals of all Governmental Authorities and officials that may be or
become necessary for their execution and delivery of, and the performance of
their obligations pursuant to, this Agreement and the Transaction Documents and
will cooperate fully with HollySys Holdings or HollySys Stockholders in promptly
seeking to obtain all such authorizations, consents, orders and approvals.
(b) CNCAC and Chardan Sub (when established) shall give promptly
such notices to third parties and use its or their best efforts to obtain such
third party consents and estoppel certificates as HollySys Holdings or HollySys
Stockholders may in their reasonable discretion deem necessary or desirable in
connection with the transactions contemplated by this Agreement.
7.8 BOOKS AND RECORDS.
(a) On and after the Closing Date, CNCAC will cause Chardan Sub
(when established) to permit the HollySys Stockholders and their
Representatives, during normal business hours, to have access to and to examine
and make copies of all books and records of HollySys Holdings, BJ HLS, HZ HLS
and HollySys Subsidiary which are delivered to CNCAC pursuant to this Agreement
and which relate to the Business, BJ HLS, HZ HLS or HollySys Subsidiary or to
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events occurring prior to the Closing Date or to transactions or events
occurring subsequent to the Closing Date which arise out of transactions or
events occurring prior to the Closing Date to the extent reasonably necessary to
the HollySys Stockholders in connection with preparation of any Tax returns, Tax
audits, government or regulatory investigations, lawsuits or any other matter in
which the HollySys Stockholders are a party to the proceeding or in which they
have a reasonable business interest.
(b) CNCAC will cause Chardan Sub to preserve and keep all books and
records with respect to HollySys Holdings, BJ HLS, HZ HLS, HollySys Subsidiary
and the Business for a period of at least seven years from the Closing Date.
After such seven year period, before Chardan Sub (when established) shall
dispose of any such books and records, at least 90 days' prior written notice to
such effect shall be given by Chardan Sub to the HollySys Stockholders and the
HollySys Stockholders shall be given an opportunity, at their cost and expense,
to remove and retain all or any part of such books or records as they may
select.
7.9 NASDAQ LISTING. After making the initial filing of the Proxy Statement
with the Commission, CNCAC shall apply to have the shares of Chardan Sub listed
in the Nasdaq National Market following the Closing.
ARTICLE VIII
ADDITIONAL COVENANTS OF THE PARTIES
8.1 OTHER INFORMATION. If in order to properly prepare documents required
to be filed with any Governmental Authority or financial statements of HollySys,
it is necessary that either Party be furnished with additional information
relating to HollySys Holdings, BJ HLS, HZ HLS and HollySys Subsidiary or the
Business, and such information is in the possession of the other Party, such
Party agrees to use its best efforts to furnish such information in a timely
manner to such other Party, at the cost and expense of the Party being furnished
such information.
8.2 MAIL RECEIVED AFTER CLOSING.
(a) If Chardan Sub, HollySys Holdings, BJ HLS, HZ HLS or HollySys
Subsidiary receives after the Closing any mail or other communications addressed
to any HollySys Stockholder, such entity may open such mail or other
communications and deal with the contents thereof in its discretion to the
extent that such mail or other communications and the contents thereof relate to
HollySys Holdings, BJ HLS, HZ HLS or HollySys Subsidiary. Chardan Sub will
deliver promptly or cause to be delivered to the HollySys Stockholders all other
mail addressed to them and the contents thereof which does not relate to
HollySys Holdings, BJ HLS, HZ HLS, HollySys Subsidiary or the Business.
(b) If any HollySys Stockholder receives after the Closing Date mail
or other communications addressed to them which relate to HollySys Holdings, BJ
HLS, HZ HLS or HollySys Subsidiary, they shall promptly deliver or cause to be
delivered all such mail and the contents thereof to Chardan Sub and HollySys
Holdings.
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8.3 FURTHER ACTION. Each of the Parties shall execute such documents and
other papers and take such further actions as may be reasonably required or
desirable to carry out the provisions hereof and the transactions contemplated
hereby. Upon the terms and subject to the conditions hereof, each of the Parties
shall use its best efforts to take, or cause to be taken, all actions and to do,
or cause to be done, all other things necessary, proper or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement.
8.4 SCHEDULES. The Parties shall have the obligation to supplement or
amend the Schedules being delivered concurrently with the execution of this
Agreement and annexed hereto with respect to any matter hereafter arising or
discovered which, if existing or known at the date of this Agreement, would have
been required to be set forth or described in the Schedules. The obligations of
the Parties to amend or supplement the Schedules being delivered herewith shall
terminate on the Closing Date. Notwithstanding any such amendment or
supplementation, for purposes of Section 0, the representations and warranties
of the Parties shall be made with reference to the Schedules as they exist at
the time of execution of this Agreement.
8.5 EXECUTION OF AGREEMENTS. On or before the Closing Date, CNCAC,
HollySys Holdings, BJ HLS, HZ HLS, HollySys Subsidiary and each HollySys
Stockholder shall execute and deliver each Transaction Document which it is a
party to.
8.6 CONFIDENTIALITY. BJ HLS, HZ HLS, HollySys Subsidiary and each HollySys
Stockholder, on the one hand, and CNCAC and, on and after the Closing Date,
Chardan Sub, on the other hand, shall hold and shall cause their respective
Representatives to hold in strict confidence, unless compelled to disclose by
judicial or administrative process or by other requirements of law, all
documents and information concerning the other Party furnished it by such other
Party or its Representatives in connection with the transactions contemplated by
this Agreement (except to the extent that such information can be shown to have
been (a) previously known by the Party to which it was furnished, (b) in the
public domain through no fault of such Party or (c) later lawfully acquired from
other sources, which source is not the agent of the other Party, by the Party to
which it was furnished), and each Party shall not release or disclose such
information to any other person, except its Representatives in connection with
this Agreement. Each Party shall be deemed to have satisfied its obligations to
hold confidential information concerning or supplied by the other Party if it
exercises the same care as it takes to preserve confidentiality for its own
similar information.
8.7 PUBLIC ANNOUNCEMENTS. From the date of this Agreement until Closing or
termination, CNCAC, HollySys Holdings, BJ HLS, HZ HLS, HollySys Subsidiary and
each HollySys Stockholder shall cooperate in good faith to jointly prepare all
press releases and public announcements pertaining to this Agreement and the
transactions governed by it, and none of the foregoing shall issue or otherwise
make any public announcement or communication pertaining to this Agreement or
the transaction without the prior consent of CNCAC (in the case of HollySys
Holdings, BJ HLS, HZ HLS, HollySys Subsidiary and each HollySys Stockholder) or
HollySys Holdings, BJ HLS, HZ HLS and the HollySys Stockholders (in the case of
CNCAC), except as required by any legal requirement or by the rules and
regulations of, or pursuant to any agreement of a stock exchange or trading
system. Each party will not unreasonably withhold approval from the others with
respect to any press release or public announcement. If any party determines
with the advice of counsel that it is required to make this Agreement and the
terms of the transaction public or otherwise issue a press release or make
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public disclosure with respect thereto, it shall at a reasonable time before
making any public disclosure, consult with the other party regarding such
disclosure, seek such confidential treatment for such terms or portions of this
Agreement or the transaction as may be reasonably requested by the other party
and disclose only such information as is legally compelled to be disclosed. This
provision will not apply to communications by any party to its counsel,
accountants and other professional advisors.
8.8 BOARD OF CHARDAN SUB. The board of directors of Chardan Sub after the
Closing will initially consist of 9 persons, with three members designated by
the HollySys Stockholders, one member designated by the Board of CNCAC, and five
directors satisfying the independence requirements of Nasdaq. In addition, the
membership of the board of directors will comply with the requirements in
Article X hereof for the existence of the Independent Committee.
8.9 STOCK OPTION POOL. CNCAC will submit to its stockholders for approval,
as part of the Proxy Statement, a proposed equity compensation plan that would
permit the granting of stock options, shares of restricted stock and other
awards to all qualified persons (including, but not limited to, management,
directors and employees). The pool of shares initially available for this plan
will equal 10% of the total shares of Chardan Sub expected to be outstanding
immediately after the Closing.
8.10 HOLLYSYS STOCK ACQUISITION. Each HollySys Stockholder who
participates in the HollySys Holdings Stock Purchase by consignment shall use
his or her best efforts to complete the acquisition of the ownership of the
HollySys Stock by HollySys Holdings from such HollySys Stockholder as soon as
such acquisition is permitted by applicable law and regulations.
ARTICLE IX
CONDITIONS TO CLOSING
9.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of
each Party to consummate the transactions contemplated by this Agreement shall
be subject to the fulfillment, at or prior to the Closing, of each of the
following conditions.
(a) Approval by CNCAC's Stockholders. This Agreement and the
transactions contemplated hereby shall have been approved by a
majority-in-interest of the common stockholders of CNCAC in accordance with
CNCAC's Certificate of Incorporation and the aggregate number of shares of
CNCAC's Common Stock held by stockholders of CNCAC (other than the Initial
Stockholders) who exercise their right to convert the shares of common stock of
CNCAC owned by them into cash in accordance with CNCAC's Certificate of
Incorporation shall not constitute 20% or more of the number of shares of
CNCAC's Common Stock outstanding as of the date of this Agreement and owned by
Persons other than the Initial Stockholders.
(b) Litigation. No order, stay, judgment or decree shall have been
issued by any Governmental Authority preventing, restraining or prohibiting in
whole or in part, the consummation of the transactions contemplated hereby or
instrumental to the consummation of the transactions contemplated hereby, and no
action or proceeding by any governmental authority shall be pending or
threatened (including by suggestion through investigation) by any person, firm,
corporation, entity or Governmental Authority, which questions, or seeks to
enjoin, modify, amend or prohibit (a) the reorganization of BJ HLS, HZ HLS and
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HollySys Subsidiary, (b) the ownership of BJ HLS, HZ HLS, HollySys Holdings, and
HollySys Subsidiary, (c) the purchase and sale and issuance of the Chardan Sub
Stock, (d) the Plan of Merger, (e) the Chardan Merger, (f) the Stockholders
Meeting and use of the Proxy Statement by CNCAC, or (g) the conduct in any
material respect of the Business as a whole or any material portion of the
Business conducted or to be conducted by BJ HLS, HZ HLS, or HollySys Subsidiary
or the (direct, indirect or beneficial) ownership of BJ HLS or HZ HLS by the
HollySys Stockholders.
(c) Transaction Documents. Each of the Transaction Documents shall
have been executed and delivered to each Party.
(d) Auditor Confirmation. CNCAC and the HollySys Stockholders shall
have received written confirmation from the Company Accountants that any
payments pursuant to Section 0 would be treated for accounting purposes as an
adjustment to the purchase price of the acquired business and not as a
compensation expense.
9.2 CONDITIONS TO OBLIGATIONS OF HOLLYSYS, HOLLYSYS SUBSIDIARY AND THE
HOLLYSYS STOCKHOLDERS. The obligations of HollySys Holdings, BJ HLS, HZ HLS,
HollySys Subsidiary and each HollySys Stockholder to consummate the transactions
contemplated by this Agreement shall be subject to the fulfillment, at or prior
to the Closing, of each of the following conditions:
(a) Deliveries. Chardan Sub shall have delivered the Chardan Sub
Stock and made the payments specified in Section 0 and the HollySys Stockholders
shall have received confirmations of the payment of the cash portion thereof and
such other documents, certificates and instruments as may be reasonably
requested by the HollySys Stockholders.
(b) Representations and Warranties; Covenants. Without
supplementation after the date of this Agreement, the representations and
warranties of CNCAC contained in this Agreement shall be with respect to those
representations and warranties qualified by any materiality standard, true and
correct as of the Closing, and with respect to all the other representations and
warranties, true and correct in all material respects as of the Closing, with
the same force and effect as if made as of the Closing, and all the covenants
contained in this Agreement to be materially complied with by CNCAC on or before
the Closing shall have been materially complied with, and CNCAC shall have
delivered a certificate signed by a duly authorized officer thereof to such
effect.
(c) Legal Opinion. HollySys Holdings, BJ HLS, HZ HLS and the
HollySys Stockholders shall have received from DLA Piper Rudnick Gray Cary US
LLP, counsel to CNCAC, a legal opinion addressed to HollySys Holdings, BJ HLS,
HZ HLS, and the HollySys Stockholders and dated the Closing Date.
(d) Chardan Sub. Chardan Sub will be an existing company under the
laws of the British Virgin Islands with the name HLS Systems International Ltd.
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(e) Consents. CNCAC and Chardan Sub shall have obtained and
delivered to HollySys Holdings, BJ HLS, HZ HLS and the HollySys Stockholders
copies of consents of all third parties, as appropriately required for the
consummation of the transactions contemplated by this Agreement.
(f) Performance of Agreements. All covenants, agreements and
obligations required by the terms of this Agreement to be performed by CNCAC at
or prior to the Closing shall have been duly and properly performed or fulfilled
in all material respects.
(g) No Adverse Changes. At the Closing, there shall have been no
material adverse change in the assets, liabilities or financial condition of
CNCAC and Chardan Sub from that shown in the CNCAC Balance Sheet and related
statements of income. Between the date of this Agreement and the Closing Date,
there shall not have occurred an event which, in the reasonable opinion of
HollySys Holdings, would have had a material adverse effect on the operations,
financial condition or prospects of CNCAC and Chardan Sub.
(h) Supplemental Disclosure. If CNCAC or Chardan Sub shall have
supplemented or amended any schedule pursuant to their obligations set forth in
Section 0 in any material respect, the HollySys Stockholders shall give notice
to CNCAC that as a result of information provided to the HollySys Stockholders
in connection with any or all of such amendments or supplements, the HollySys
Stockholders have determined to proceed with the consummation of the
transactions contemplated hereby.
(i) Necessary Proceedings. All proceedings, corporate or otherwise,
to be taken by CNCAC and Chardan Sub in connection with the consummation of the
transactions contemplated by this Agreement shall have been duly and validly
taken, and copies of all documents, resolutions and certificates incident
thereto, duly certified by CNCAC and Chardan Sub, as appropriate, as of the
Closing, shall have been delivered to HollySys Holdings, BJ HLS, HZ HLS and the
HollySys Stockholders.
(j) Trustee Notice. CNCAC (or Chardan Sub), simultaneously with the
Closing, will deliver to the trustee of the trust account of CNCAC (or Chardan
Sub) instructions to disburse the funds therein to the HollySys stockholders,
pursuant to the terms of Section 0, (or their designees) and to CNCAC.
(k) Resignations. Effective as of the Closing, the directors and
officers of CNCAC who are not continuing as directors and officers of CNCAC (or
as the case may be, Chardan Sub) will have resigned and agreed that they have no
claim for employment compensation in any form from CNCAC.
(l) Employment Agreement. BJ HLS and HZ HLS shall have entered into
the employment agreements provided for in Section 9.3.
9.3 CONDITIONS TO OBLIGATIONS OF CNCAC. The obligations of CNCAC to
consummate the transactions contemplated by this Agreement shall be subject to
the fulfillment, at or prior to the Closing, of each of the following
conditions:
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(a) Deliveries. The HollySys Stockholders shall have delivered the
HollySys Holdings Stock and the Stock Consignment Agreements listed on Schedule
9.3(a) confirmations of receipt of payments specified in Section 0, and Chardan
Sub shall have received the same and such other documents, certificates and
instruments as may be reasonably requested by CNCAC and the Chardan Sub;
(b) Representations and Warranties; Covenants. Without
supplementation after the date of this Agreement, the representations and
warranties of each HollySys Stockholder contained in this Agreement shall be
with respect to those representations and warranties qualified by any
materiality standard, true and correct in all respects as of the Closing, and
with respect to all the other representations and warranties, true and correct
in all material respects as of the Closing, with the same force and effect as if
made as of the Closing, and all the covenants contained in this Agreement to be
complied with by HollySys Holdings, BJ HLS, HZ HLS, HollySys Subsidiary and each
HollySys Stockholder on or before the Closing shall have been materially
complied with, and CNCAC shall have received a certificate of each HollySys
Stockholder to such effect;
(c) Legal Opinion. CNCAC shall have received from Guan Tao Law Firm
counsel for BJ HLS, HZ HLS, HollySys Holdings, HollySys Subsidiary and the
HollySys Stockholders, a legal opinion addressed to CNCAC, dated the Closing
Date;
(d) Consents. HollySys Holdings, BJ HLS, HZ HLS, HollySys Subsidiary
and each HollySys Stockholder shall have obtained and delivered to CNCAC
consents of all third parties required by the Contracts and Permits set forth in
Schedule 9.3(d);
(e) Regulatory Approvals. Any Governmental Authority whose approval
or consent is required each shall have unconditionally approved of the
transactions of HollySys Holdings Stock Purchase contemplated by this Agreement
and CNCAC shall have received written confirmation thereof;
(f) Performance of Agreements. All covenants, agreements and
obligations required by the terms of this Agreement to be performed by HollySys
Holdings, BJ HLS, HZ HLS, HollySys Subsidiary and each HollySys Stockholder at
or prior to the Closing shall have been duly and properly performed or fulfilled
in all material respects;
(g) No Adverse Change. At the Closing, there shall have been no
material adverse change in the assets, liabilities, financial condition or
prospects of HollySys Holdings, BJ HLS, HZ HLS, HollySys Subsidiary or the
Business from that shown or reflected in the September Financial Statements and
as described in the Proxy Statement. Between the date of this Agreement and the
Closing Date, there shall not have occurred an event which, in the reasonable
opinion of CNCAC, would have a HollySys Material Adverse Effect;
(h) Supplemental Disclosure. If HollySys Holdings, BJ HLS, HZ HLS,
HollySys Subsidiary or any HollySys Stockholder shall have supplemented or
amended any Schedule pursuant to their obligations set forth in Section 0 in any
material respect, CNCAC shall provide notice to HollySys Holdings, BJ HLS, HZ
HLS and the HollySys Stockholders that, as a result of information provided to
CNCAC in connection with any or all of such amendments or supplements, CNCAC has
determined to proceed with the consummation of the transactions contemplated
hereby; and
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(i) Necessary Proceedings. All proceedings, corporate or otherwise,
to be taken by HollySys Holdings, BJ HLS, HZ HLS, HollySys Subsidiary and each
HollySys Stockholder in connection with the consummation of the transactions of
HollySys Holdings Stock Purchase contemplated by this Agreement shall have been
duly and validly taken, and copies of all documents, resolutions and
certificates incident thereto, duly certified by HollySys Holdings, BJ HLS, HZ
HLS, HollySys Subsidiary and each HollySys Stockholder, as appropriate, as of
the Closing, shall have been delivered to CNCAC.
(j) HollySys Proxy Information. The HollySys Proxy Information, at
the time of distribution of the Proxy Statement and at Closing, will accurately
reflect the Business, HollySys Holdings, BJ HLS, HZ HLS, HollySys Subsidiary,
and the HollySys Stockholders, and the HollySys Proxy Information will not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements in the HollySys Proxy Information not
misleading.
(k) Employment Agreement. Each of Dr. Wang Changli and Ms. Qiao Li
shall have entered into an employment agreement with BJ HLS in the form of
Exhibit F.
ARTICLE X
INDEMNIFICATION
10.1 INDEMNIFICATION BY HOLLYSYS STOCKHOLDERS. Subject to the limitations
set forth in Section 0, each of the HollySys Stockholders shall indemnify and
hold harmless CNCAC (or Chardan Sub after the Closing) from and against, and
shall reimburse CNCAC (or Chardan Sub after the Closing) for, any Damages which
may be sustained, suffered or incurred by them, whether as a result of any Third
Party Claim or otherwise, and which arise from or in connection with or are
attributable to the breach of any of the representations or warranties or
covenants of HollySys Holdings, BJ HLS, HZ HLS, HollySys Subsidiary or the
HollySys Stockholders contained in this Agreement. Indemnification pursuant to
this Section 0 shall be the sole remedy of CNCAC (or Chardan Sub after the
Closing) with respect to any breach of the representations and warranties or
covenants of HollySys Holdings, BJ HLS, HZ HLS, HollySys Subsidiary or any
HollySys Stockholder contained in this Agreement. This indemnity shall survive
the Closing for a period of four years after the Closing Date with respect to
Claims arising under the foregoing clause (i) other than Claims arising as a
result of a breach of the representations and warranties in Sections 0, 0, 0, 0,
0, 0, 4.1, 4.2 and 4.3, as to which it shall survive without limitation as to
time, and (ii) Claims arising as a result of a breach of the representations and
warranties in Sections 3.6, 0, 0 and 0, as to which it shall survive for a
period of six months after the expiration of the statute of limitations. Each
HollySys Stockholder shall give prompt written notice to CNCAC (or Chardan Sub
after the Closing) of any Third Party Claims or other facts and circumstances
known to them which may entitle CNCAC (or Chardan Sub after the Closing) to
indemnification under this Section 0.
10.2 INDEMNIFICATION BY CNCAC. Subject to the limitations set forth in
Section 0, CNCAC (and Chardan Sub after the Closing) shall indemnify and hold
harmless each HollySys Stockholder from and against, and shall reimburse each
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HollySys Stockholder for, any Damages which may be sustained, suffered or
incurred by such HollySys Stockholder, whether as a result of Third Party Claims
or otherwise, and which arise or result from or in connection with or are
attributable to the breach of any of CNCAC's representations or warranties or
covenants contained in this Agreement. The indemnity in the foregoing clause (a)
shall survive the Closing for a period of four years after the Closing Date.
CNCAC (or Chardan Sub after the Closing) shall give each HollySys Stockholder
prompt written notice of any Third Party Claims or other facts and circumstances
known to it which may entitle them to indemnification under this Section 0.
10.3 NOTICE, ETC. A Party required to make an indemnification payment
pursuant to this Agreement ("Indemnifying Party") shall have no liability with
respect to Third Party Claims or otherwise with respect to any covenant,
representation, warranty, agreement, undertaking or obligation under this
Agreement unless the Party entitled to receive such indemnification payment
("Indemnified Party") gives notice to the Indemnifying Party specifying (i) the
covenant, representation or warranty, agreement, undertaking or obligation
contained herein which it asserts has been breached, (ii) in reasonable detail,
the nature and dollar amount (or estimate, if the magnitude of the Claim cannot
be precisely determined at that time) of any Claim the Indemnified Party may
have against the Indemnifying Party by reason thereof under this Agreement, and
(iii) whether or not the Claim is a Third Party Claim. With respect to Third
Party Claims, an Indemnified Party (i) shall give the Indemnifying Party prompt
notice of any Third Party Claim, (ii) prior to taking any action with respect to
such Third Party Claim, shall consult with the Indemnifying Party as to the
procedure to be followed in defending, settling, or compromising the Third Party
Claim, (iii) shall not consent to any settlement or compromise of the Third
Party Claim without the written consent of the Indemnifying Party (which consent
shall not be unreasonably withheld or delayed), and (iv) shall permit the
Indemnifying Party, if it so elects, to assume the exclusive defense of such
Third Party Claim (including, except as provided in the penultimate sentence of
this Section, the compromise or settlement thereof) at its own cost and expense.
If the Indemnifying Party shall elect to assume the exclusive defense of any
Third Party Claim pursuant to this Agreement, it shall notify the Indemnified
Party in writing of such election, and the Indemnifying Party shall not be
liable hereunder for any fees or expenses of the Indemnified Party's counsel
relating to such Third Party Claim after the date of delivery to the Indemnified
Party of such notice of election. The Indemnifying Party will not compromise or
settle any such Third Party Claim without the written consent of the Indemnified
Party (which consent shall not be unreasonably withheld or delayed) if the
relief provided is other than monetary damages or such relief would have a
material adverse effect on the Indemnified Party. Notwithstanding the foregoing,
if the Indemnifying Party elects to assume the defense with respect to any Third
Party Claim, the Indemnifying Party shall have the right to compromise or settle
for solely monetary damages such Third Party Claim, provided such settlement
will not result in or have a material adverse effect on the Indemnified Party.
Notwithstanding the foregoing, the Party which defends any Third Party Claim
shall, to the extent required by any insurance policies of the Indemnified
Party, share or give control thereof to any insurer with respect to such Claim.
10.4 LIMITATIONS.
(a) No HollySys Stockholder shall be required to indemnify CNCAC
under Section 0 unless the aggregate of all amounts for which indemnity would
otherwise be due against them exceeds $250,000, but then the HollySys
Stockholders will be liable for the full amount of Damages.
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(b) CNCAC (or Chardan Sub after Closing) shall not be required to
indemnify any HollySys Stockholder under Section 0 unless the aggregate of all
amounts for which indemnity would otherwise be due against it exceeds $250,000,
but then CNCAC (or Chardan Sub after Closing) will be liable for the full amount
of Damages.
(c) If a Third Party Claim subject to indemnification by any
HollySys Stockholder is brought against HollySys Holdings, BJ HLS, HZ HLS or
HollySys Subsidiary and HollySys Holdings, BJ HLS, HZ HLS and/or HollySys
Subsidiary prevails in the defense thereof, such HollySys Stockholder shall not
be required to indemnify CNCAC (or Chardan Sub after Closing) with respect to
the costs of such defense, including attorneys' fees.
10.5 ADJUSTMENT TO PURCHASE PRICE; SETOFF. Any indemnification payments
made pursuant to Sections 0 and 0 shall be deemed to be an adjustment to the
Purchase Price. To the extent that any HollySys Stockholder is obligated to
indemnify CNCAC or the Chardan Sub after Closing under the provisions of the
Article X for Damages reduced to a monetary amount, CNCAC or Chardan Sub after
Closing shall have the right to adjust any amount due and owing or to be due and
owing under any agreement with the HollySys Stockholder (or its designee),
whether under this Agreement or any other agreement between the HollySys
Stockholder and any of CNCAC's or Chardan Sub's affiliates, subsidiaries or
controlled persons or entities (including shares issuable pursuant to Section
1.3). To the extent that CNCAC or Chardan Sub is obligated to indemnify any
HollySys Stockholders after Closing under the provisions of this Article X for
Damages reduced to a monetary amount, such HollySys Stockholders after Closing
shall have the right to decrease any amount due and owing or to be due and owing
under any agreement with CNCAC or Chardan Sub, whether under this Agreement or
any other agreement between the HollySys Stockholder and any of CNCAC's or
Chardan Sub's affiliates, subsidiaries or controlled persons or entities.
10.6 CLAIMS ON BEHALF OR IN RIGHT OF CNCAC AND CHARDAN SUB. Pursuant to
the provisions of this Article X, if any Claim for indemnification is to be
brought against the HollySys Stockholders on behalf of or by right of CNCAC, (or
Chardan Sub after Closing) such claims will be determined by the Independent
Committee of the Board of Directors. Any settlement of a Claim for
indemnification brought on behalf of or by right of CNCAC (or Chardan Sub after
Closing) shall be determined and approved by the Independent Committee of the
Board of Directors. The Independent Committee of the Board of Directors of CNCAC
(or Chardan Sub after the Closing) will consist of at least two persons which
mutually agreed by HollySys Stockholders and CNCAC, none of which are officers
or employees of CNCAC (or Chardan Sub after the Closing) or any of their
operating subsidiary companies or are direct or beneficial owners of 5% or more
of the voting capital stock of CNCAC (or Chardan Sub after the Closing). For a
period of not less than four years after Closing or until final resolution of
Claims under this Section X brought by or by right of CNCAC (or Chardan Sub
after Closing) the Board of Directors of CNCAC (or Chardan Sub after Closing)
will maintain a sufficient number of directors such that it will be able to
maintain the Independent Committee.
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ARTICLE XI
TERMINATION AND ABANDONMENT
11.1 METHODS OF TERMINATION. The transactions contemplated herein may be
terminated and/or abandoned at any time but not later than the Closing:
(a) by mutual written consent of CNCAC and HollySys Stockholders;
(b) by CNCAC, if HollySys Holdings, BJ HLS, HZ HLS, HollySys
Subsidiary or any HollySys Stockholder amends or supplements any BJ HLS, HZ HLS,
HollySys Subsidiary or HollySys Stockholder schedule hereto in accordance with
Section 0 hereof and such amendment or supplement reflects a material adverse
change in the condition (financial or other), operations or prospects of
HollySys or HollySys Subsidiary or the Business, as a whole or in part, after
the date hereof, or (2) by the HollySys Stockholders, if CNCAC amends or
supplements any CNCAC Schedule hereto in accordance with Section 0 hereof and
such amendment or supplement reflects a material adverse change in the condition
(financial or other) or operations of CNCAC.
(c) by either CNCAC or the HollySys Stockholders, if the Closing has
not occurred by June 30, 2006 (or such other date as may be extended from time
to time by written agreement of CNCAC and HollySys Stockholders); provided,
however, that the right to terminate this Agreement under this Section 0 shall
not be available to any Party that is then in breach of any of its covenants,
representations or warranties in this Agreement;
(d) by the HollySys Stockholders, (i) if CNCAC shall have breached
any of its covenants in Articles VII or VIII hereof in any material respect or
(ii) if the representations and warranties of CNCAC contained in this Agreement
shall not be true and correct in all material respects, at the time made, or
(iii) if such representations and warranties shall not be true and correct at
and as of the Closing Date as though such representations and warranties were
made again at and as of the Closing Date, except to the extent that such
representations are made herein as of a specific date prior to the Closing Date,
and in any such event, if such breach is subject to cure, CNCAC has not cured
such breach within 10 Business Days of notice from the HollySys Stockholders of
an intent to terminate;
(e) by CNCAC, (i) if HollySys Holdings, BJ HLS, HZ HLS, HollySys
Subsidiary or any HollySys Stockholder shall have breached any of the covenants
in Articles VI or VIII hereof in any material respect or (ii) if the
representations and warranties of any HollySys Stockholder contained in this
Agreement shall not be true and correct in all material respects, at the time
made, or (iii) if such representations and warranties shall not be true and
correct at and as of the Closing Date as though such representations and
warranties were made again at and as of the Closing Date, except to the extent
that such representations are made herein as of a specific date prior to the
Closing Date, and in any such event, if such breach is subject to cure, the
HollySys Stockholder have not cured such breach within 10 Business Days of
CNCAC's notice of an intent to terminate;
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(f) by CNCAC if the Board of Directors of CNCAC shall have
determined in good faith, based upon the advice of outside legal counsel, that
failure to terminate this Agreement is reasonably likely to result in the Board
of Directors breaching its fiduciary duties to stockholders under applicable law
by reason of the pendency of an unsolicited, bona fide written proposal for a
superior transaction;
(g) by either CNCAC or the HollySys Stockholders, if, at CNCAC's
Stockholder Meeting (including any adjournments thereof), this Agreement and the
transactions contemplated thereby shall fail to be approved and adopted by the
affirmative vote of the holders of CNCAC's common stock required under its
Certificate of Incorporation, or 20% or more of the number of shares of CNCAC's
common stock outstanding as of the date of the record date of the stockholders
meeting held by Persons other than the Initial Stockholders exercise their
rights to convert the shares of CNCAC's common stock held by them into cash in
accordance with CNCAC's Certificate of Incorporation.
11.2 EFFECT OF TERMINATION.
(a) In the event of termination and abandonment by CNCAC or by
HollySys, or both, pursuant to Section 0 hereof, written notice thereof shall
forthwith be given to the other Party, and except as set forth in this Section
0, all further obligations of the Parties shall terminate, no Party shall have
any right against the other Party hereto, and each Party shall bear its own
costs and expenses.
(b) Consequence of Termination. If the transactions contemplated by
this Agreement are terminated and/or abandoned as provided herein:
(i) each Party hereto will return all documents, work papers
and other material (and all copies thereof) of the other Party relating to the
transactions contemplated hereby, whether so obtained before or after the
execution hereof, to the Party furnishing the same; and
(ii) all confidential information received by either Party
hereto with respect to the business of the other Party, or in the case of the
HollySys Stockholders, of BJ HLS, HZ HLS and HollySys Subsidiary, hereto shall
be treated in accordance with Section 0 hereof, which shall survive such
termination or abandonment.
11.3 NO CLAIM AGAINST TRUST FUND. It is understood by HollySys Holdings,
BJ HLS, HZ HLS and the HollySys Stockholders that in the event of breach of this
Agreement or any of the Transactional Documents by CNCAC and Chardan Sub, that
they have no right to any amount held in the trust fund referred to in Section 0
and they will not make any claim against CNCAC and Chardan Sub that would
adversely affect the business, operations or prospects of CNCAC and Chardan Sub
or the amount of the funds held in the trust fund referred to in Section 0.
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ARTICLE XII
DEFINITIONS
12.1 CERTAIN DEFINED TERMS. As used in this Agreement, the following terms
shall have the following meanings:
"Actions" means any claim, action, suit, litigation, arbitration, inquiry,
proceeding or investigation by or pending before any Governmental Authority.
"Business" means the combined and several operations and proposed combined
and several operations of BJ HLS, HZ HLS, the HollySys Subsidiary and their
respective affiliates, contract parties and nominees (or beneficial owners) in
the field of industrial automation and control systems.
"Business Day" means a day of the year on which banks are not required or
authorized to be closed in the City of New York.
"Claim" means any claim, demand, suit, proceeding or action.
"Company's Accountants" means BDO Seidman, LLP.
"Contracts" mean any contract, agreement, arrangement, plan, lease,
license or similar instrument.
"Copyrights" shall mean all copyrights, including rights in and to works
of authorship and all other rights corresponding thereto throughout the world,
whether published or unpublished, including rights to prepare, reproduce,
perform, display and distribute copyrighted works and copies, compilations and
derivative works thereof.
"Damages" means the dollar amount of any loss, damage, expense or
liability, including, without limitation, reasonable attorneys' fees and
disbursements incurred by an Indemnified Party in any action or proceeding
between the Indemnified Party and the Indemnifying Party or between the
Indemnified Party and a third party, which is determined (as provided in Article
X) to have been sustained, suffered or incurred by a Party or the Company and to
have arisen from or in connection with an event or state of facts which is
subject to indemnification under this Agreement; the amount of Damages shall be
the amount finally determined by a court of competent jurisdiction or
appropriate governmental administrative agency (after the exhaustion of all
appeals) or the amount agreed to upon settlement in accordance with the terms of
this Agreement, if a Third Party Claim, or by the Parties, if a Direct Claim.
"Direct Claim" means any claim other than a Third Party Claim.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles, consistently
applied in the United States.
"Government Securities" means any Treasury Bill issued by the United
States having a maturity of one hundred and eighty days or less.
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"Governmental Authority" means any PRC or non-PRC national, supranational,
state, provincial, local or similar government, governmental, regulatory or
administrative authority, agency or commission or any court, tribunal or
judicial or arbitral body.
"Governmental Order" means any order, writ, judgment, injunction, decree,
stipulation, determination or award entered by or with any Governmental
Authority.
"Intellectual Property" means any intellectual property rights, including,
without limitations, Patents, Copyrights, service marks, moral rights, Trade
Secrets, Trademarks, designs and Technology, together with (a) all registrations
and applications for registration therefore and (b) all rights to any of the
foregoing (including (i) all rights received under any license or other
arrangement with respect to the foregoing, (ii) all rights or causes of action
for infringement or misappropriation (past, present or future) of any of the
foregoing, (iii) all rights to apply fore or register any of the foregoing),
(iv) domain names and URL's of or relating to the Acquired Assets and variations
of the domain names and URL's, (vi) Contracts which related to any of the
foregoing, including invention assignment, intellectual property assignment,
confidentiality, and non-competition agreements, and (vii) goodwill of any of
the foregoing.
"Initial Stockholders" means all of the shares of common stock of CNCAC
issued and outstanding prior to August 2, 2005 held by various Persons.
"Laws" means all statutes, rules, regulations, ordinances, orders, writs,
injunctions, judgments, decrees, awards and restrictions, including, without
limitation, applicable statutes, rules, regulations, orders and restrictions
relating to zoning, land use, safety, health, environment, hazardous substances,
pollution controls, employment and employment practices and access by the
handicapped.
"Lien" means any lien, claim, contingent interest, security interest,
charge, restriction or encumbrance.
"Party" means CNCAC, Chardan Sub , on the one hand, and BJ HLS, HZ HLS,
each HollySys Subsidiary and each HollySys Stockholder, on the other hand
(collectively, "Parties").
"Patents" means all United States and foreign patents and utility models
and applications therefore and all reissues, divisions, re-examinations,
renewals, extensions, provisionals, continuations and continuations-in-part
thereof, and equivalent or similar rights anywhere in the world in inventions
and discoveries.
"Permits" means all governmental registrations, licenses, permits,
authorizations and approvals.
"Person" means an individual, partnership, corporation, joint venture,
unincorporated organization, cooperative or a governmental entity or agency
thereof.
"PRC GAAP" means PRC Accounting Standards for Business Enterprises in
effect from time to time applied consistently throughout the periods involved.
"Release" means any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, leaching, dumping or disposing into
the environment.
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"Representatives" of either Party means such Party's employees,
accountants, auditors, actuaries, counsel, financial advisors, bankers,
investment bankers and consultants.
"Securities Act" means the Securities Act of 1933, as amended.
"Software" means all software, in object, human-readable or source code,
whether previously completed or now under development, including programs,
applications, databases, data files, coding and other software, components or
elements thereof, programmer annotations, and all versions, upgrades, updates,
enhancements and error corrections of all of the foregoing.
"Stockholder Meeting" has the meaning specified in Section 0.
"Tax" or "Taxes" means all income, gross receipts, sales, stock transfer,
excise, bulk transfer, use, employment, social security, franchise, profits,
property or other taxes, tariffs, imposts, fees, stamp taxes and duties,
assessments, levies or other charges of any kind whatsoever (whether payable
directly or by withholding), together with any interest and any penalties,
additions to tax or additional amounts imposed by any government or taxing
authority with respect thereto.
"Technology" means any know-how, confidential or proprietary information,
name, data, discovery, formulae, idea, method, process, procedure, other
invention, record of invention, model, research, Software, technique,
technology, test information, market survey, website, or information or material
of a like nature, whether patentable or unpatentable and whether or not reduced
to practice.
"Third Party Claim" means a Claim by a person, firm, corporation or
government entity other than a party hereto or any affiliate of such party.
"Trade Secrets" means all trade secrets under applicable law and other
rights in know-how and confidential or proprietary information, processing,
manufacturing or marketing information, including new developments, inventions,
processes, ideas or other proprietary information that provides advantages over
competitors who do not know or use it and documentation thereof (including
related papers, blueprints, drawings, chemical compositions, formulae, diaries,
notebooks, specifications, designs, methods of manufacture and data processing
software and compilations of information) and all claims and rights related
thereto.
"Trademarks" means any and all United States and foreign trademarks,
service marks, logos, trade names, corporate names, trade dress, Internet domain
names and addresses, and all goodwill associated therewith throughout the world.
ARTICLE XIII
GENERAL PROVISIONS
13.1 EXPENSES. Except as otherwise provided herein, all costs and
expenses, including, without limitation, fees and disbursements of
Representatives, incurred in connection with the preparation of this Agreement
and the transactions contemplated hereby shall be paid by the Party incurring
such costs and expenses, whether or not the Closing shall have occurred.
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13.2 NOTICES. All notices and other communications given or made pursuant
hereto shall be in writing and shall be deemed to have been duly given or made
as of the date delivered or mailed if delivered personally or by nationally
recognized courier or mailed by registered mail (postage prepaid, return receipt
requested) or by telecopy to the Parties at the following addresses (or at such
other address for a Party as shall be specified by like notice, except that
notices of changes of address shall be effective upon receipt):
(a) If to the HollySys Stockholders:
Beijing HollySys Company, Ltd.
Attn: Dr. Wang Changli
19 Jiancaicheng Middle Road, Xisangi
Haidon District
Beijing, China 100096
Facsimile No.: 86 10 829 23985
with a copy to:
GuanTao Law Firm
Attn: Mr. Sun Dongying
6/F, Tower B, Tong Tai Plaza
No. 33 Finance Street
Xicheng District
Beijing 10032
(b) If to CNCAC or the CNCAC Initial Stockholders:
Chardan North China Acquisition Corporation
625 Broadway, Suite 1111
San Diego, California 92101
Attention: Dr. Richard D. Propper
Facsimile No.: (619) 795-9639
with a copy to:
DLA Piper Rudnick Gray Cary US LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Attention: Douglas J. Rein
Facsimile No.: 858-677-1401
13.3 AMENDMENT. This Agreement may not be amended or modified except by an
instrument in writing signed by the Parties.
13.4 WAIVER. At any time prior to the Closing, either Party may (a) extend
the time for the performance of any of the obligations or other acts of the
other Party, (b) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto and (c) waive
compliance with any of the agreements or conditions contained herein. Any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed by the Party to be bound thereby.
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13.5 HEADINGS. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
13.6 SEVERABILITY. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any Party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the Parties shall negotiate in good
faith to modify this Agreement so as to effect the original intent of the
Parties as closely as possible in an acceptable manner to the end that
transactions contemplated hereby are fulfilled to the extent possible.
13.7 ENTIRE AGREEMENT. This Agreement and the Schedules and Exhibits
hereto constitute the entire agreement and supersede all prior agreements and
undertakings, both written and oral, between BJ HLS, HZ HLS, any HollySys
Subsidiary, any HollySys Stockholder and CNCAC with respect to the subject
matter hereof and, except as otherwise expressly provided herein, are not
intended to confer upon any other person any rights or remedies hereunder.
13.8 BENEFIT. This Agreement shall inure to the benefit of and be binding
upon the successors and assigns of the Parties.
13.9 GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the law of the State of Delaware.
13.10 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, and by the different Parties in separate counterparts, each of
which when executed shall be deemed to be an original but all of which when
taken together shall constitute one and the same agreement.
13.11 APPROVAL OF CONTEMPORANEOUS TRANSACTIONS. By execution of this
Agreement, the HollySys Stockholders also approve the Chardan Merger and the
adoption of the proposed equity compensation plan contemplated by Section 8.9.
(SIGNATURES ON NEXT PAGE)
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IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
as of the date first written above.
CHARDAN NORTH CHINA ACQUISITION
CORPORATION LOU AN
By:______________________________ By:______________________________
Name: Name:
Title:
SHANGHAI JINQIAOTONG INDUSTRIAL
DEVELOPMENT CO. TEAM SPIRIT INDUSTRIAL LIMITED
By:______________________________ By:______________________________
Name: Name:
Title:
WANG CHANGLI OSCAF INTERNATIONAL CO.
By:______________________________ By:______________________________
Name: Name:
CHENG WUSI
By:______________________________
Name:
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Annex B
TERRITORY OF THE BRITISH VIRGIN ISLANDS
THE BVI BUSINESS COMPANIES ACT, 2004
(the "Act")
MEMORANDUM OF ASSOCIATION
OF
HLS SYSTEMS INTERNATIONAL, LTD.
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1 NAME
The name of the Company is HLS Systems International, Ltd.
2 COMPANY LIMITED BY SHARES
The Company is a company limited by shares. The liability of each member
is limited to the amount from time to time unpaid on such member's shares.
3 REGISTERED OFFICE
The first registered office of the Company will be situated at the office
of the registered agent which is at P.O. Box 173, Kingston Chambers, Road
Town, Tortola, British Virgin Islands or such other place as the directors
or members may from time to time decide, being the office of the
registered agent.
4 REGISTERED AGENT
The first registered agent of the Company will be Maples Finance BVI
Limited of P.O. Box 173, Kingston Chambers, Road Town, Tortola, British
Virgin Islands or such other registered agent as the directors or members
may decide from time to time.
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5 GENERAL OBJECTS AND POWERS
Subject to Regulation 6 below the objects for which the Company is
established are unrestricted and the Company shall have full power and
authority to carry out any object not prohibited by the BVI Business
Companies Act, 2004 or as the same may be revised from time to time, or
any other law of the British Virgin Islands.
6 LIMITATIONS ON THE COMPANY'S BUSINESS
For the purposes of section 9(4) of the Act the Company has no power to:
(a) carry on banking or trust business, unless it is licensed under the
Banks and Trust Companies Act, 1990;
(b) carry on business as an insurance or as a reinsurance company,
insurance agent or insurance broker, unless it is licensed under an
enactment authorising it to carry on that business;
(c) carry on the business of company management unless it is licensed
under the Companies Management Act, 1990;
(d) carry on the business of providing the registered office or the
registered agent for companies incorporated in the British Virgin
Islands; or
(e) carry on the business as a mutual fund, mutual fund manager or
mutual fund administrator unless it is licensed under the Mutual
Funds Act, 1996.
7 AUTHORISED SHARES
(a) The Company is authorised to issue one hundred and one million
shares of two classes as follows:-
(i) one hundred million shares in one series of US$0.001 par value
each ("Ordinary Shares"); and
(ii) one million preference shares in one series of US$0.001 par
value each ("Preferred Shares").
(b) The shares in the Company shall be issued in the currency of the
United States of America.
(c) Each Ordinary Share in the Company confers on the holder:
(i) the right to one vote at a meeting of the members of the
Company or on any resolution of the members of the Company;
(ii) the right to an equal share in any dividend paid by the
Company in accordance with the Act; and
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(iii) the right to an equal share in the distribution of the surplus
assets of the Company.
(d) Preferred Shares
(i) The rights, privileges, restrictions and conditions attaching
to the Preferred Shares shall be those provided pursuant to
the Act as modified or negated by the directors of the Company
on the issuance of the Preferred Shares.
(ii) The Board of Directors of the Company is authorised, subject
to limitations prescribed by law and the provisions of this
Clause 7, to amend the Company's Memorandum of Association to
provide for the creation from time to time of one or more
series of Preferred Shares or classes of shares having
preferred rights, and pursuant to such amendment to establish
the number of shares and series to be included in each such
class, and to fix the designation, relative rights,
preferences, qualifications and limitations of the shares of
each such class. The authority of the Board of Directors with
respect to each class shall include, but not be limited to,
determination of the following:
(a) the number of shares and series constituting that class and
the distinctive designation of that class;
(b) the distribution rate on the shares of that class, whether
distributions shall be cumulative, and, if so, from which date
or dates, and whether they shall be payable in preference to,
or in another relation to, the distributions payable on any
other class or classes of shares;
(c) whether that class shall have voting rights, in addition to
the voting rights provided by law, and, if so, the terms of
such voting rights;
(d) whether that class shall have conversion or exchange
priviledges, and, if so, the terms and conditions of such
conversion or exchange, including provision for adjustment of
the conversion or exchange rate in such events as the Board of
Directors shall determine;
(e) whether or not the shares of that class shall be redeemable,
and, if so, the terms and conditions of such redemption,
including the manner of selecting shares for redemption if
less than all shares are to be redeemed, the date or dates
upon or after which they shall be redeemable, and the amount
per share payable in case of redemption, which amount may vary
under different conditions and at different redemption dates;
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(f) whether that class shall be entitled to the benefit of a
sinking fund to be applied to the purchase or redemption of
shares of that class, and, if so, the terms and amounts of
such sinking fund;
(g) the right of the shares of that class to the benefit of
conditions and restrictions upon the creation of indebtedness
of the Company or any subsidiary, upon the issue of any
additional shares (including additional shares of such class
of any other class) and upon the payment of dividends or the
making of other distribution on, and the purchase, redemption
or other acquisition by the Company or any subsidiary of any
outstanding shares of the Company;
(h) the right of the shares of that class in the event of any
voluntary or involuntary liquidation, dissolution or winding
up of the Company and whether such rights shall be in
preference to, or in another relation to, the comparable
rights of any other class or classes of shares; and
(i) any other relative, participating, optional or other special
rights, qualifications, limitations or restrictions of that
class.
8 REGISTERED SHARES ONLY
Shares in the Company may only be issued as registered shares and the
Company is not authorised to issue bearer shares. Registered shares may
not be exchanged for bearer shares or converted to bearer shares.
9 AMENDMENTS
Subject to the provisions of the Act, the Company shall by resolution of
the directors or members have the power to amend or modify any of the
conditions contained in this Memorandum of Association.
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We, Maples Finance BVI Limited of P.O. Box 173, Kingston Chambers, Road Town,
Tortola, British Virgin Islands in our capacity as registered agent for the
Company hereby apply to the Registrar for the incorporation of the Company this
6th day of February 2006.
Incorporator
--------------------------------
Clinton Hempel
Authorised Signatory
Maples Finance BVI Limited
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Annex C
TERRITORY OF THE BRITISH VIRGIN ISLANDS
THE BVI BUSINESS COMPANIES ACT, 2004
ARTICLES OF ASSOCIATION
OF
HLS SYSTEMS INTERNATIONAL, LTD.
INTERPRETATION
1 References in these Articles of Association ("Articles") to the Act shall
mean the BVI Business Companies Act, 2004. The following Articles shall
constitute the Articles of the Company. In these Articles, words and
expressions defined in the Act shall have the same meaning and, unless
otherwise required by the context, the singular shall include the plural
and vice versa, the masculine shall include the feminine and the neuter
and references to persons shall include corporations and all legal
entities capable of having a legal existence.
SHARES
2 Every person whose name is entered as a member in the share register,
being the holder of registered shares, shall without payment, be entitled
to a certificate signed by a director or under the common seal of the
Company with or without the signature of any director or officer of the
Company specifying the share or shares held and the par value thereof,
provided that in respect of shares held jointly by several persons, the
Company shall not be bound to issue more than one certificate and delivery
of a certificate for a share to one of several joint holders shall be
sufficient delivery to all.
3 If a certificate is worn out or lost it may be renewed on production of
the worn out certificate, or on satisfactory proof of its loss together
with such indemnity as the directors may reasonably require. Any member
receiving a share certificate shall indemnify and hold the Company and its
officers harmless from any loss or liability which it or they may incur by
reason of wrongful or fraudulent use or representation made by any person
by virtue of the possession of such a certificate.
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SHARES AND VARIATION OF RIGHTS
4 Subject to the provisions of the Memorandum of Association and these
Articles, the unissued shares of the Company (whether forming part of the
original or any increased authorised shares) shall be at the disposal of
the directors who may offer, allot, grant options over or otherwise
dispose of them to such persons at such times and for such consideration,
being not less than the par value of the shares being disposed of, and
upon such terms and conditions as the directors may determine, and in the
absence of fraud the decision of the directors as to the value of the
consideration received by the Company in respect of the issue is
conclusive unless a question of law is involved.
5 Without prejudice to any special rights previously conferred on the
holders of any existing shares or class of shares, any share in the
Company may be issued with such preferred, deferred or other special
rights or such restrictions, whether in regard to dividend, voting or
otherwise as the directors may from time to time determine.
6 Subject to the provisions of the Act in this regard, shares may be issued
on the terms that they are redeemable, or at the option of the Company be
liable to be redeemed on such terms and in such manner as the directors
before or at the time of the issue of such shares may determine.
7 Shares in the Company may be issued for money, services rendered, personal
property, an estate in real property, a promissory note or other binding
obligation to contribute money or property or any combination of the
foregoing as shall be determined by a resolution of directors.
8 A share issued by the Company upon conversion of, or in exchange for,
another share or a debt obligation or other security in the Company, shall
be treated for all purposes as having been issued for money equal to the
consideration received or deemed to have been received by the Company in
respect of the other share, debt obligation or security.
9 The Company may issue fractions of a share and a fractional share shall
have the same corresponding fractional liabilities, limitations,
preferences, privileges, qualifications, restrictions, rights and other
attributes of a whole share of the same class or series of shares.
10 The directors may redeem any share issued by the Company at a premium.
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11 If at any time the Company is authorised to issue shares of more than one
class the rights attached to any class (unless otherwise provided by the
terms of issue of the shares of that class) may, whether or not the
Company is being wound up, be varied with the consent in writing of the
holders of a majority of the issued shares of that class and the holders
of a majority of the issued shares of any other class of shares which may
be affected by such variation.
12 The rights conferred upon the holders of the shares of any class issued
with preferred or other rights shall not, unless otherwise expressly
provided by the terms of issue of the shares of that class, be deemed to
be varied by the creation or issue of further shares ranking pari passu
therewith.
13 Except as required by the Act, no person shall be recognised by the
Company as holding any share upon any trust, and the Company shall not be
bound by or be compelled in any way to recognise (even when having notice
thereof) any equitable, contingent, future or partial interest in any
share or any interest in any fractional part of a share or (except as
provided by these Articles or by the Act) any other rights in respect of
any share except any absolute right to the entirety thereof by the
registered holder.
TRANSFER OF SHARES
14 Subject to any limitations in the Memorandum of Association, shares in the
Company shall be transferred by a written instrument of transfer signed by
the transferor and containing the name and address of the transferee. The
instrument of transfer shall also be signed by the transferee if
registration as a holder of the shares imposes a liability to the Company
on the transferee. The instrument of transfer of a registered share shall
be sent to the Company for registration.
15 Subject to the Memorandum of Association, these Articles and to Section
54(5) of the Act, the Company shall, on receipt of an instrument of
transfer, enter the name of the transferee of the share in the register of
members unless the directors resolve to refuse or delay the registration
of the transfer for reasons that shall be specified in the resolution.
TRANSMISSION OF SHARES
16 Subject to Sections 52(2) and 53 of the Act, the executor or administrator
of a deceased member, the guardian of an incompetent member or the trustee
of a bankrupt member shall be the only person recognised by the Company as
having any title to his share, save that and only in the event of death,
incompetence or bankruptcy of any member or members of the Company as a
consequence of which the Company no longer has any directors or members,
then upon the production of any documentation which is reasonable evidence
of the applicant being entitled to:
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(a) a grant of probate of the deceased's will, or grant of letters of
administration of the deceased's estate, or confirmation of the
appointment as executor or administrator (as the case may be), of a
deceased member's estate; or
(b) the appointment of a guardian of an incompetent member; or
(c) the appointment as trustee of a bankrupt member; or
(d) upon production of any other reasonable evidence of the applicant's
beneficial ownership of, or entitlement to the shares,
to the Company's registered agent in the British Virgin Islands together
with (if so requested by the registered agent) a notarised copy of the
share certificate(s) of the deceased, incompetent or bankrupt member, an
indemnity in favour of the registered agent and appropriate legal advice
in respect of any document issued by a foreign court, then the
administrator, executor, guardian or trustee in bankruptcy (as the case
may be) notwithstanding that their name has not been entered in the share
register of the Company, may by written resolution of the applicant,
endorsed with written approval by the registered agent, be appointed a
director of the Company or entered in the share register as the legal and
or beneficial owner of the shares.
17 The production to the Company of any document which is reasonable evidence
of:
(a) a grant of probate of the will, or grant of letters of
administration of the estate, or confirmation of the appointment as
executor, of a deceased member; or
(b) the appointment of a guardian of an incompetent member; or
(c) the trustee of a bankrupt member; or
(d) the applicant's legal and or beneficial ownership of the shares,
shall be accepted by the Company even if the deceased, incompetent member
or bankrupt member is domiciled outside the British Virgin Islands if the
document is issued by a foreign court which had competent jurisdiction in
the matter. For the purposes of establishing whether or not a foreign
court had competent jurisdiction in such a matter the directors may obtain
appropriate legal advice. The directors may also require an indemnity to
be given by the executor, administrator, guardian or trustee in
bankruptcy.
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18 Any person becoming entitled by operation of law or otherwise to a share
or shares in consequence of the death, incompetence or bankruptcy of any
member may be registered as a member upon such evidence being produced as
may reasonably be required by the directors. An application by any such
person to be registered as a member shall for all purposes be deemed to be
a transfer of shares of the deceased, incompetent or bankrupt member and
the directors shall treat it as such.
19 Any person who has become entitled to a share or shares in consequence of
the death, incompetence or bankruptcy of any member may, instead of being
registered himself, request in writing that some person to be named by him
be registered as the transferee of such share or shares and such request
shall likewise be treated as if it were a transfer.
20 What amounts to incompetence on the part of a person is a matter to be
determined by the court having regard to all the relevant evidence and the
circumstances of the case.
ACQUISITION OF OWN SHARES
21 Subject to the provisions of the Act in this regard, the directors may, on
behalf of the Company purchase, redeem or otherwise acquire any of the
Company's own shares for such consideration as they consider fit, and
either cancel or hold such shares as treasury shares. The directors may
dispose of any shares held as treasury shares on such terms and conditions
as they may from time to time determine. Shares may be purchased or
otherwise acquired in exchange for newly issued shares in the Company.
22 No purchase, redemption or other acquisition of shares shall be made
unless the directors determine that immediately after the purchase,
redemption or other acquisition the Company will be able to pay its debts
as they fall due and the value of the assets of the Company exceeds its
liabilities.
23 Shares that the Company purchases, redeems or otherwise acquires pursuant
to the preceding Regulation may be cancelled or held as treasury shares
except to the extent that such shares are in excess of 80 percent of the
issued shares of the Company in which case they shall be cancelled but
they shall be available for reissue.
24 Subject to the provisions to the contrary in;
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(a) the Memorandum of Association or these Articles;
(b) the designations, powers, preferences, rights, qualifications,
limitations and restrictions with which the shares were issued; or
(c) the subscription agreement for the issue of the shares;
the Company may not purchase, redeem or otherwise acquire its own shares
without the consent of members whose shares are to be purchased, redeemed
or otherwise acquired.
MEETINGS OF MEMBERS
25 Any action required or permitted to be taken by the members must be
effected at a duly called meeting (as described in Regulations 28, 29 and
30) of the members entitled to vote on such action and may not be effected
by written resolution.
26 The directors may convene meetings of the members of the Company at such
times and in such manner and places as the directors consider necessary or
desirable, and they shall convene such a meeting upon the written request
of members entitled to exercise at least fifty (50) percent of the voting
rights in respect of the matter for which the meeting is requested.
27 An annual meeting of members for election of directors and for such other
business as may come before the meeting shall be held each year at such
date and time as may be determined by the directors.
28 Seven (7) days notice at the least specifying the place, the day and the
hour of the meeting and general nature of the business to be conducted
shall be given in the manner hereinafter mentioned to such persons whose
names on the date the notice is given appear as members in the share
register of the Company and are entitled to vote at the meeting.
29 The directors may fix the record date for determining those shares that
are entitled to vote at the meeting.
30 Notwithstanding Article 28, a meeting of members held in contravention of
the requirement to give notice is valid if members holding a ninety (90)
percent majority of:
(a) the total voting rights on all the matters to be considered at the
meeting; or
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(b) the votes of each class or series of shares where members are
entitled to vote thereon as a class or series together with an
absolute majority of the remaining votes,
have waived notice of the meeting and, for this purpose, the presence of a
member in person or by proxy at the meeting shall be deemed to constitute
waiver on his part.
31 The inadvertent failure of the directors to give notice of a meeting to a
member or the fact that a member has not received the notice, shall not
invalidate the meeting.
32 A member shall be deemed to be present at a meeting of members if he
participates by telephone or other electronic means and all members
participating in the meeting are able to hear each other.
33 The following shall apply in respect of joint ownership of shares:
(a) if two or more persons hold shares jointly each of them may be
present in person or by proxy at a meeting of members and may speak
as a member;
(b) if only one of the joint owners is present in person or by proxy he
may vote on behalf of all joint owners; and
(c) if two or more of the joint owners are present in person or by proxy
they must vote as one.
PROCEEDINGS AT MEETINGS OF MEMBERS
34 No business shall be transacted at any meeting unless a quorum of members
is present at the time when the meeting proceeds to business. Save as set
out in Regulation 35 a quorum shall consist of the holder or holders
present in person or by proxy entitled to exercise at least fifty (50)
percent of the voting rights of the shares of each class or series of
shares entitled to vote as a class or series thereon and the same
proportion of the votes of the remaining shares entitled to vote thereon.
35 If, within two hours from the time appointed for the meeting, a quorum is
not present, the meeting, if convened upon the requisition of members,
shall be dissolved; in any other case it shall stand adjourned to the next
business day at the same time and place or to such other time and place as
the directors may determine, and if at the adjourned meeting there are
present within one hour from the time appointed for the meeting in person
or by proxy not less than one third of the votes of the shares or each
class or series of shares entitled to vote on the resolutions to be
considered by the meeting, those present shall constitue a quorum but
other wise the meeting shall be dissolved.
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36 At every meeting the members present shall choose someone of their number
to be the chairman (the "Chairman"). If the members are unable to choose a
Chairman for any reason, then the person representing the greatest number
of voting shares present at the meeting shall preside as Chairman failing
which the oldest individual member present at the meeting or failing any
member personally attending the meeting, the proxy present at the meeting
representing the oldest member of the Company, shall take the chair.
37 At any meeting of members, only such business shall be conducted as shall
have been brought before such meeting:
(a) by or at the direction of the Chairman of the Board of Directors (as
defined in Regulation 84); or
(b) by any member who is a holder of record at the time of the giving of
the notice provided for in Regulation 28 who is entitled to vote at
the meeting and who complies with the procedures set out in
Regulation 43.
38 The Chairman may, with the consent of the meeting, adjourn any meeting
from time to time, and from place to place, but no business shall be
transacted at any adjourned meeting other than the business left
unfinished at the meeting from which the adjournment took place.
39 At any meeting a resolution put to the vote of the meeting shall be
decided on a show of hands by a simple majority unless a poll is (before
or on the declaration of the result of the show of hands) demanded:
(a) by the Chairman; or
(b) by any member present in person or by proxy and holding not less
than one tenth of the total voting shares issued by the Company and
having the right to vote at the meeting.
40 Unless a poll be so demanded, a declaration by the Chairman that a
resolution has, on a show of hands been carried, and an entry to that
effect in the book containing the minutes of the proceedings of the
Company, shall be sufficient evidence of the fact, without proof of the
number or proportion of the votes recorded in favour of or against such
resolution.
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41 If a poll is duly demanded it shall be taken in such manner as the
Chairman directs, and the result of the poll shall be deemed to be the
resolution of the meeting at which the poll was demanded. The demand for a
poll may be withdrawn.
42 In the case of an equality of votes, whether on a show of hands, or on a
poll, the Chairman of the meeting at which the show of hands takes place,
or at which the poll is demanded, shall be entitled to a second or casting
vote.
43 For business to be properly brought to the annual meeting of members by a
member, the member must have given timely written notice thereof, either
by personal delivery or by prepaid registered post to the secretary of the
Company (the "Secretary") at the principal executive offices of the
Company. To be timely, a member's notice must be received at the principal
executive offices of the Company, not less than 120 days in advance of the
first anniversary of the date that the Company's (or the Company's
predecessor's) proxy statement was sent to members in connection with the
previous year's annual meeting of members, except that if no annual
meeting was held in the previous year or the date of the annual meeting is
more than 30 calendar days earlier than the date of the prior year's
annual meeting, notice by a member to be timely must be received not later
than the close of business on the tenth day following the day on which the
date of the annual meeting is publicly announced (including by disclosure
in a press release or in a document filed with the Securities and Exchange
Commission). For the purposes of this Article 43, any adjournment(s) or
postponement(s) of the original meeting whereby the meeting will reconvene
within 30 days from original date shall be deemed, for purposes of notice,
to be a continuation of the original meeting and no business may be
brought before any reconvened meeting unless such timely notice of such
business was given to the Secretary for the meeting as original scheduled.
A member's notice to the Secretary shall set out as to each matter that
the member wishes to be brought before the meeting of members:
(i) a brief description of the business desired to be brought before the
meeting;
(ii) the name and address of record of the member proposing such
business;
(iii) the class and number of shares of the Company which are beneficially
owned by such member;
(iv) any material interest of such member in such business; and
(v) if the member intends to solicit proxies in support of such member's
proposal, a representation to that effect.
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44 Notwithstanding the aforegoing, nothing in Regulation 43 shall be
interpreted or construed to require the inclusion of information about any
such proposal in any proxy statement distributed by, at the direction of,
or on behalf of, the directors. The chairman of a meeting of members
shall, if the facts so warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with
the provisions of this Regulation 44 and, if he should so determine, he
shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted. However, the notice
requirements set out in Regulation 43 shall be deemed satisfied by a
member if the member has notified the Company of his intention to present
a proposal at a meeting of members and such member's proposal has been
included in a proxy statement that has been distributed by, at the
direction of, or on behalf of, the directors to solicit proxies for such
meeting; provided that, if such member does not appear or send a qualified
representative, as determined by the chairman of the meeting, to present
such proposal at such meeting, the Company need not present such proposal
for a vote at such meeting notwithstanding that proxies in respect of such
vote may have been received by the Company.
VOTES OF MEMBERS
45 At any meeting of members whether on a show of hands or on a poll every
holder of a voting share present in person or by proxy shall have one vote
for every voting share of which he is the holder.
46 Subject to the Memorandum of Association or these Articles, an action that
may be taken by members of the Company at a meeting of members may also be
taken by a resolution of members consented to in writing or by telex,
telegram, cable or other written electronic communication, without the
need for any notice.
47 If a committee is appointed for any member who is of unsound mind, that
member may vote by such committee.
48 .
49 Any person other than an individual which is a member of the Company may
by resolution of its directors or other governing body authorise such
person as it thinks fit to act as its representative at any meeting of the
Company or of any class of members of the Company, and the person so
authorised shall be entitled to exercise the same powers on behalf of the
person which he represents as that person could exercise if it were an
individual member of the Company.
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50 Votes may be given either personally or by proxy.
51 The instrument appointing a proxy shall be produced at the place appointed
for the meeting before the time for holding the meeting at which the
person named in such instrument proposes to vote.
52 Subject to Article 53 below, an instrument appointing a proxy shall be in
such form as the Chairman of the meeting shall accept as properly
evidencing the wishes of the member appointing the proxy.
53 The instrument appointing a proxy shall be in writing under the hand of
the appointer or in electronic form signed by the appointer unless the
appointer is a corporation or other form of legal entity other than one or
more individuals holding as joint owner in which case the instrument
appointing a proxy shall be in writing under the hand of an individual
duly authorised by such corporation or legal entity to execute the same.
The Chairman of any meeting at which a vote is cast by proxy so authorised
may call for a notarially certified copy of such authority which shall be
produced within seven days of being so requested failing which the vote or
votes cast by such proxy shall be disregarded.
54 Directors of the Company may attend and speak with members of the Company
and at any separate meeting of the holders of any class or series of
shares in the Company.
55 No business of the Company shall be conducted at a meeting of members
except in accordance with the provisions of these Regulations 34 to 55.
CORPORATIONS ACTING BY REPRESENTATIVES AT MEETINGS
56 Any corporation or other form of corporate legal entity which is a member
of the Company may by resolution of its directors or other governing body
authorise such person as it thinks fit to act as its representative at any
meeting of the members or any class of members of the Company, and the
person so authorised shall be entitled to exercise the same powers on
behalf of the corporation which he represents as that corporation could
exercise if it were an individual member of the Company.
(A) DIRECTORS
57 Subject to any subsequent amendment to change the number of directors, the
number of the directors shall be not less than one or more than fifteen.
Subject to the requirements of the Memorandum of Association, the
directors may by a resolution of directors, amend this Regulation 57 to
change the number of directors.
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58 Subject to Regulation 57 to change the number of directors, the continuing
directors may act, notwithstanding any casual vacancy in their body, so
long as there remain in office not less than the prescribed minimum of
directors duly qualified to act, but if the number falls below the
prescribed minimum, the remaining directors shall not act except for the
purpose of filling such vacancy.
59 The first director or directors shall be appointed by the registered agent
of the Company. Thereafter, the directors shall be appointed by the
members or the directors for such terms as the members or directors may
determine and may be removed by a resolution of the majority of the
members of the Company, being for the purposes of this Regulation 59 only,
an affirmative vote of the holders of 66 2/3 percent or more of the
outstanding votes of the shares entitled to vote thereon or by a
resolution of directors .
60 Notwithstanding the provisions of Section 114 of the Act, each director
holds office until his successor takes office or until his earlier death,
resignation or removal by the members as per Regulation 59 or a resolution
passed by the majority of the remaining directors.
61 A vacancy in the board of directors may be filled by a resolution of
members or a resolution passed by the majority of the remaining directors.
62 A director shall not require a share qualification, but nevertheless shall
be entitled to attend and speak at any meeting of the members and at any
separate meeting of the holders of any class of shares in the Company. A
director must be an individual.
63 A director, by writing under his hand deposited at the registered office
of the Company, may from time to time appoint another director or another
person to be his alternate. Every such alternate shall be entitled to be
given notice of meetings of the directors and to attend and vote as a
director at any such meeting at which the director appointing him is not
personally present and generally at such meeting to have and exercise all
the powers, rights, duties and authorities of the director appointing him.
Every such alternate shall be deemed to be an officer of the Company and
shall not be deemed to be an agent of the director appointing him. If
undue delay or difficulty would be occasioned by giving notice to a
director of a resolution of which his approval is sought in accordance
with Article 92 his alternate (if any) shall be entitled to signify
approval of the same on behalf of that director. The remuneration of an
alternate shall be payable out of the remuneration payable to the director
appointing him, and shall consist of such portion of the last mentioned
remuneration as shall be agreed between such alternate and the director
appointing him. A director by writing under his hand deposited at the
registered office of the Company may at any time revoke the appointment of
an alternate appointed by him. If a director shall die or cease to hold
the office of director, the appointment of his alternate shall thereupon
cease and terminate.
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64 The directors may, by resolution, fix the emolument of directors in
respect of services rendered or to be rendered in any capacity to the
Company. The directors may also be paid such travelling, hotel and other
expenses properly incurred by them in attending and returning from
meetings of the directors, or any committee of the directors or meetings
of the members, or in connection with the business of the Company as shall
be approved by resolution of the directors.
65 Any director who, by request, goes or resides abroad for any purposes of
the Company, or who performs services which in the opinion of the Board go
beyond the ordinary duties of a director, may be paid such extra
remuneration (whether by way of salary, commission, participation in
profits or otherwise) as shall be approved by resolution of the directors.
66 The Company may pay to a director who at the request of the Company holds
any office (including a directorship) in, or renders services to, any
company in which the Company may be interested, such remuneration (whether
by way of salary, commission, participation in profits or otherwise) in
respect of such office or services as shall be approved by resolution of
the directors.
67 (a) Nominations of persons for election to the Board of Directors shall be
made only at a meeting of members and only:
(i) by or at the direction of the directors; or
(ii) by a member entitled to vote for the election of directors who
complies with the notice procedures set out below.
(b) Such nominations, other than those made by or at the direction of
the directors, shall be made pursuant to timely notice in writing to
the Secretary. To be timely, a member's notice must be received at
the principal executive offices of the Company not less than 120
days in advance of the first anniversary of the date that the
Company's (or the Company's predecessor's) proxy statement was sent
to members in connection with the previous year's annual meeting of
members, except that if no annual meeting was held in the previous
year or the date of the annual meeting is more than 30 calendar days
earlier than the date of the prior year's annual meeting, notice by
a member to be timely must be received not later than the close of
business on the tenth day following the day on which the date of the
annual meeting is publicly announced (including by disclosure in a
press release or in a document filed with the Securities and
Exchange Commission).. For the purposes of this Regulation 67, any
adjournment or postponement of the original meeting whereby the
meeting will reconvene within 30 days from the original date shall
be deemed for the purposes of this notice to be a continuation of
the original meeting and no nominations by a member of persons to be
elected directors of the Company may be made at any such reconvened
meeting unless pursuant to a notice which was timely for the meeting
on the date original scheduled. Each such notice shall set out
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(i) the name and address of the member who intends to make the
nomination and of the persons to be nominated.
(ii) a representation that the member is a holder of record of
shares in the Company entitled to vote at such meeting and
that he intends to appear in person or by proxy at the meeting
to nominate the persons specified in the notice;
(iii) a description of all arrangements or understandings between
the member and each nominee and any other person (naming such
person) pursuant to which the nominations are to be made by
the member.
(iv) such other information regarding each nominee proposed by such
member as would have been required to be included in a proxy
statement filed pursuant to the proxy rules of the United
States Securities and Exchange Commission, had each nominee
been nominated, or intended to be nominated, by the directors;
(v) the consent of each nominee to serve as a director of the
Company if so elected; and
(vi) if the member intends to solicit proxies in support of such
member's nominees, a representation to that effect.
68 The office of director shall be vacated if the director:
(a) is removed from office by resolution of members; or
(b) is removed from office by resolution of the directors of the
Company;
(c) becomes disqualified to act as a director under Section 111 of the
Act;
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(d) absent from meetings of the directors for six consecutive months
without leave of the board of directors, provided that the directors
shall have power to grant any director leave of absence for any or
an indefinite period;
(e) if he dies; or
(f) if he becomes of unsound mind.
69 (a) A director may hold any other office or position of profit under the
Company (except that of auditor) in conjunction with his office of
director, and may act in a professional capacity to the Company on such
terms as to remuneration and otherwise as the directors shall arrange.
(b) A director may be or become a director or officer of, or otherwise
be interested in any company promoted by the Company, or in which
the Company may be interested, as a member or otherwise and no such
director shall be accountable for any remuneration or other benefits
received by him as director or officer or from his interest in such
other company. The directors may also exercise the voting powers
conferred by the shares in any other company held or owned by the
Company in such manner in all respects as they think fit, including
the exercise thereof in favour of any resolutions appointing them,
or of their number, directors or officers of such other company, or
voting or providing for the payment of remuneration to the directors
or officers of such other company. A director may vote in favour of
the exercise of such voting rights in the manner aforesaid
notwithstanding that he may be, or be about to become, a director or
officer of such other company, and as such in any other manner is,
or may be, interested in the exercise of such voting rights in the
manner aforesaid.
(c) No director shall be disqualified by his office from contracting
with the Company either as a vendor, purchaser or otherwise, nor
shall any such contract or arrangement entered into by or on behalf
of the Company in which any director shall be in any way interested
be voided, nor shall any director so contracting or being so
interested be liable to account to the Company for any profit
realised by any such contract or arrangement, by reason of such
director holding that office or by reason of the fiduciary
relationship thereby established, provided the procedure in
Regulation 69 (d) below is followed.
(d) A director of the Company shall, immediately after becoming aware of
the fact that he is interested in a transaction entered into or to
be entered into by the Company, disclose such interest to the board
of directors.
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(e) A director of the Company is not required to comply with Regulation
69 (d) above if:
(i) the transaction or proposed transaction is between the
director and the Company; and
(ii) the transaction or proposed transaction is or is to be entered
into in the ordinary course of the Company's business and on
usual terms and conditions.
(f) For the purposes of Regulation 69(d) above, a disclosure to the
board to the effect that a director is a member, director, officer
or trustee of another named company or other person and is to be
regarded as interested in any transaction which may, after the date
of the entry or disclosure, be entered into with that company or
person, is a sufficient disclosure of interest in relation to that
transaction.
(g) Subject to Section 125(1) of the Act, the failure by a director to
comply with Regulation 69(d) does not affect the validity of a
transaction entered into by the director or the Company.
OFFICERS
70 The directors of the Company may, by resolution of directors, appoint
officers of the Company at such times as shall be considered necessary or
expedient, and such officers may consist of a President, one or more Vice
Presidents, a Secretary, and a Treasurer and/or such other officers as may
from time to time be deemed desirable. The officers shall perform such
duties as shall be prescribed at the time of their appointment subject to
any modifications in such duties as may be prescribed by the directors
thereafter, but in the absence of any specific allocation of duties it
shall be the responsibility of the President to manage the day to day
affairs of the Company, the Vice Presidents to act in order of seniority
in the absence of the President, but otherwise to perform such duties as
may be delegated to them by the President, the Secretary to maintain the
registers, minute books and records (other than financial records) of the
Company and to ensure compliance with all procedural requirements imposed
on the Company by applicable law, and the Treasurer to be responsible for
the financial affairs of the Company.
71 Any person may hold more than one office and no officer need be a director
or member of the Company. The officers shall remain in office until
removed from office by the directors, whether or not a successor is
appointed.
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72 Any officer who is a body corporate may appoint any person its duly
authorised representative for the purpose of representing it and of
transacting any of the business of the officers.
(B) MANAGING DIRECTORS
73 The directors may from time to time and by resolution of directors appoint
one or more of their number to be a managing director or joint managing
director and may, subject to any contract between him or them and the
Company, from time to time terminate his or their appointment and appoint
another or others in his or their place or places.
74 A director appointed in terms of the provisions of Regulation 75 to the
office of managing director of the Company may be paid, in addition to the
remuneration payable in terms of Regulation 66, such remuneration not
exceeding a reasonable maximum in each year in respect of such office as
may be determined by a disinterested quorum of the directors.
75 The directors may from time to time, by resolution of directors, entrust
and confer upon a managing director for the time being such of the powers
and authorities vested in them as they think fit, save that no managing
director shall have any power or authority with respect to the matters
requiring a resolution of directors under the Act.
POWERS OF DIRECTORS
76 The business of the Company shall be managed by the directors who may pay
all expenses incurred preliminary to and in connection with the formation
and registration of the Company, and may exercise all such powers of the
Company necessary for managing and for directing and supervising, the
business and affairs of the Company as are not by the Act or by these
Articles required to be exercised by the members subject to any delegation
of such powers as may be authorised by these Articles and permitted by the
Act and to such requirements as may be prescribed by resolution of the
members, but no requirement made by resolution of the members shall
prevail if it be inconsistent with these Articles nor shall such
requirement invalidate any prior act of the directors which would have
been valid if such requirement had not been made.
77 The board of directors may entrust to and confer upon any director or
officer any of the powers exercisable by it upon such terms and conditions
and with such restrictions as it thinks fit, and either collaterally with,
or to the exclusion of, its own powers, and may from time to time revoke,
withdraw, alter or vary all or any of such powers. Subject to the
provisions of Section 110 of the Act, the directors may delegate any of
their powers to committees consisting of such member or members of their
body as they think fit. Any committees so formed shall in the exercise of
powers so delegated conform to any regulations that may be imposed on it
by the directors or the provisions of the Act.
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78 The directors may from time to time by power of attorney appoint any
company, firm or person or body of persons to be the attorney or attorneys
of the Company for such purposes and with such powers, authorities and
discretions (not exceeding those vested in or exercisable by the directors
under these Articles) and for such period and subject to such conditions
as the directors think fit.
79 Any director who is a body corporate may appoint any person its duly
authorised representative for the purpose of representing it at meetings
of the directors and of transacting any of the business of the directors.
80 All cheques, promissory notes, drafts, bills of exchange and other
negotiable instruments and all receipts for monies paid to the Company,
shall be signed, drawn, accepted, endorsed or otherwise executed as the
case may be, in such manner as the directors shall from time to time by
resolution determine.
81 The directors may exercise all the powers of the Company to borrow money
and to mortgage or charge its undertakings and property, to issue
debentures, debenture stock and other securities whenever money is
borrowed or as security for any debt, liability or obligation of the
Company or of any third party.
82 The continuing directors may act notwithstanding any vacancy in their
body, save that if the number of directors shall have been fixed at two or
more persons and by reason of vacancies having occurred in the board of
directors there shall be only one continuing director, he shall be
authorised to act alone only for the purpose of appointing another
director.
PROCEEDINGS OF DIRECTORS
83 The meetings of the board of directors and any committee thereof shall be
held at such place or places as the directors shall decide.
84 The directors may elect a chairman (the "Chairman of the Board of
Directors") of their meeting and determine the period for which he is to
hold office. If no such Chairman of the Board of Directors is elected, or
if at any meeting the Chairman of the Board of Directors is not present at
the time appointed for holding the meeting, the directors present may
choose one of their number to be Chairman of the Board of Directors for
the meeting. If the directors are unable to choose a Chairman of the Board
of Directors, for any reason, then the oldest director present at the
meeting shall preside as the Chairman of the Board of Directors.
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85 The directors may meet together for the dispatch of business, adjourn and
otherwise regulate their meetings as they think fit. Questions arising at
any meeting shall be decided by a majority of votes. In case of an
equality in votes the Chairman shall have a second or casting vote. A
director may at any time summon a meeting of the directors. If the Company
shall have only one director, the provisions hereinafter contained for
meetings of the directors shall not apply but such sole director shall
have full power to represent and act for the Company in all matters and in
lieu of minutes of a meeting shall record in writing and sign a note of
memorandum of all matters requiring a resolution of the directors. Such
note or memorandum shall constitute sufficient evidence of such resolution
for all purposes.
86 A director shall be given not less than three (3) days notice of a meeting
of the directors.
87 Notwithstanding Regulation 88, a meeting of directors held in
contravention of Regulation 884 is valid if a majority of the directors,
entitled to vote at the meeting, have waived the notice of the meeting;
and, for this purpose, the presence of a director at the meeting shall be
deemed to constitute waiver on his part.
88 The inadvertent failure to give notice of a meeting to a director, or the
fact that a director has not received the notice shall not invalidate the
meeting.
89 A meeting of the directors is duly constituted for all purposes if at the
commencement of the meeting there are present in person or by alternate
not less than one-half of the total number of directors unless there are
only 2 directors in which case the quorum shall be 2.
90 If within half an hour from the time appointed for the meeting a quorum is
not present, the meeting shall be dissolved.
91 Any one or more members of the board of directors or any committee thereof
may participate in a meeting of such board of directors or committee by
means of a conference telephone or similar communications equipment
allowing all persons participating in the meeting to hear each other at
the same time. Participating by such means shall constitute presence in
person at a meeting.
92 A resolution approved by a majority of the directors for the time being
entitled to receive notice of a meeting of the directors or of a committee
of the directors and taking the form of one or more documents in writing
or by telefax or other written or electronic communication shall be as
valid and effectual as if it had been passed at a meeting of the directors
or of such committee duly convened and held, without the need for any
notice.
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COMMITTEES
93 The directors may, by resolution of directors, designate one or more
committees, each consisting of one or more directors.
94 Each committee of directors has such powers and authorities of the
directors, including the power and authority to affix the Seal, as are set
forth in the resolution of directors establishing the committee, except
that no committee has any power or authority to amend the Memorandum of
Association or these Articles, to appoint directors or fix their
emoluments or to appoint officers or agents of the Company.
95 The meeting and proceedings of each committee of directors consisting of 2
or more directors shall be governed mutatis mutandis by the provisions of
these Articles regulating the proceedings of directors so far as the same
are not superseded by any provisions in the resolution establishing the
committee.
(ii) INDEMNITY
96 Subject to the provisions of the Act, the Company may indemnify against
all expenses, including legal fees, and against all judgments, fines and
amounts paid in settlement and reasonably incurred in connection with
legal, administrative or investigative proceedings any person who:
(a) is or was a party or is threatened to be made a party to any
threatened, pending or completed proceedings, whether civil,
criminal, administrative or investigative, by reason of the fact
that the person is or was a director of the Company; or
(b) is or was, at the request of the Company, serving as a director of,
or in any other capacity is or was acting for, another company or a
partnership, joint venture, trust or other enterprise.
